Why are Vodafone and TPG merging?

Why are Vodafone and TPG merging?

Creation of a $15 billion challenger set to disrupt Australian market

Mark Iles (Tech Research Asia)

Mark Iles (Tech Research Asia)

Credit: Channel Asia

As the dust settles on an industry-defining merger within the telecommunications market in Australia, how will the Vodafone Hutchinson Australia (VHA) and TPG Telecom deal play out?

Following weeks of media speculation, the headline takeaway so far has been the creation of a $15 billion challenger to take on Telstra and Optus.

But in delving deeper, the move also stands to impact the fixed broadband market.

VHA - which represents a joint venture between Vodafone Group and Hutchison Telecommunications - is currently Australia's third mobile services provider with six million customers but no fixed broadband presence.

The telco competes with Telstra who has more than 17 million mobile subscribers and Optus, who boasts over 10 million users.

Within the fixed broadband market, Telstra has more than three million subscribers, and this is where the merger with TPG could bring an advantage to Vodafone, through the addition of 1.9 million fixed broadband customers.

“I think this represents an interesting move,” observed Mark Iles, executive analyst at Tech Research Asia. “This is something Vodafone New Zealand did back in 2005.

“The real challenge in the Australian market with Vodafone is that it’s very difficult to be profitable as a number three.”

For Iles, this is a move that Vodafone - having experienced a positive result across the Tasman after acquiring ihug from iiNet in 2006 - could have emulated earlier in Australia.

“The challenge with Vodafone has always been 'how do they broaden their portfolio to sell more services to more customers’,” added Iles, who was general manager of business at Vodafone Australia from 2004-2006.

“I personally never understood why they weren't more aggressive in their acquisition of an ISP.”

In December 2017, Vodafone announced its first fixed-line broadband services in Australia through the National Broadband Network.

Initially, the services were being offered in six cities: Sydney; Melbourne; Canberra; Geelong; Newcastle and Wollongong.

“What is really surprising is the question of, why are they doing it now?” Iles asked. “Especially now they have just become an RSP for NBN.

“Literally at the point that the business doesn’t arguably need to acquire an ISP to be able to sell fixed-line services because they can just go the NBN, is the time that they are talking about merging with TPG.”

As reported by ARN, Vodafone and TPG Telecom confirmed plans to merge in Australia on 30 August, with the combined entity set to create a $15 billion “challenger” in the market.

Both parties primarily intend to take on Telstra and Optus in a competitive local industry, driven by an “integrated fixed and mobile offering”.

“Together TPG and Vodafone will have a comprehensive portfolio of fixed and mobile products, and will own the infrastructure required to deliver faster services and more competitive value propositions to Australian customers," said David Teoh, chairman of TPG, when speaking to shareholders.

Billed as a “merger of equals”, the provider brings together more than 27,000km of metropolitan and inter-capital fibre networks, alongside a mobile network with over 5,000 sites.

“The combination of the two companies will create an organisation with the necessary scale, breadth and financial strength for the future," added Iñaki Berroeta, CEO of VHA.

“The equal terms of the combination preserves the competitive strengths of the two businesses, meaning a sustainable long-term mixed/mobile competitor to Telstra and Optus.

“The big winners of this will be Australia’s consumers, with the new company able to deliver even greater competition and value.”

In assessing the early implications of the deal, Iles believes the merger would give the combined entity an instant leg up in the market.

Specifically, Iles said a “broader portfolio” and the ability to share costs such as those generated from call centre and other operations would bring advantage to the new business from the outset.

“It’s a good move for both of them,” Iles added. “Having a clear number three offering combined mobile and fixed-line services, I think it could be interesting. TPG is certainly hungry.”

In taking a step back from the agreement - and assessing the wider market - Iles believes the Australian telecommunications industry still requires further consolidation.

“Starting to see the landscape consolidate will be a good thing because the market just can't sustain this many players,” Iles added.

“In a landscape where people are demanding more bandwidth and you have to give away plans with 10Gb of mobile data, or 15Gb or even 30Gb, that is very expensive to deliver.”

Iles’ observations align to one of the points mentioned by Berroeta, who said that the merged business would have enhanced capacity to invest in new technology and innovation.

The merger - which was unanimously backed by TPG's board - still requires shareholder and court approval, alongside the green light from the Australian Competition and Consumer Commission (ACCC) and the Foreign Investment Review Board.

Soon after the announcement, the ACCC issued a statement revealing it would begin a public review which should take 12 weeks to be completed.

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Tags VodafoneTelstraoptusTPG Telecomtech research asia


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