KIM WINGEREI. The Curious Case of a Telco Merger Opposed

Sep 26, 2019

On one side of the courtroom: TPG, a consumer-oriented telco grown large on acquisitions and minimalist customer service, run by a reclusive billionaire. Next to them is Vodafone, a mobile carrier with a global brand, the perennial number three in the Australian market, no stranger to customer service issues, and yet to make a profit after more than a decade of trying. Across the floor: the ACCC, telling them they cannot merge.

TPG and Vodafone try to make the case the merger is crucial to their very survival and will be a tremendous benefit to Australian consumers. The ACCC argues a merged entity will lessen competition. They may all be wrong, so what’s the poor judge to make of it all?

To understand the background, we need to go back to April 2017 when TPG announced it would spend $1.2 billion to buy mobile spectrum and another $600 million to build a mobile network and compete with Telstra, Optus and Vodafone. Many within the industry questioned the price they paid for spectrum (the highest price paid anywhere in the world), and the low balling of the investment in network infrastructure. Macquarie Bank, not known to back a loser, had no such qualms, raking in the fees for a capital raising helping to pay for the purchase. The share-market applauded and the share price shot up while Telstra’s share price went the other way.

In one of the more striking revelations from the court proceedings, a weekend’s worth of spreadsheet manipulation by the TPG finance team miraculously changed a negative net present value of the investment to a much rosier picture to please Macquarie and investors. The TPG board, apparently, did not question much of anything. According to majority shareholder and chief David Teoh, “they have full trust in his assessment”.

Fast forward to August 2018. First, the Australian Government announces a ban on Chinese company Huawei from supplying equipment to the next generation of mobile networks (5G, promising faster speeds). Second, TPG and Vodafone announce their proposed merger, to “provide scale and financial strength to compete more effectively with Telstra and Optus.”

The ACCC voiced its misgivings about the merger in a preliminary report in December 2018. In January this year, TPG announced it can no longer build a mobile network because of the ban on Huawei announced five months earlier. The TPG board must still be thrilled with David Teoh, though, despite this decision taking five months and facing a loss of the $1.2 billion spectrum purchase, plus investments already made in infrastructure. According to Teoh the decision was not at all related to the ACCC’s opposition to the Vodafone merger, just plain business as usual.

To lend credibility to that statement, they wrote off some of the network investment in their FY 2019 annual accounts, but it still carries substantial value on their balance sheet – unused and unloved to the tune of about $1 billion.

The ACCC was not buying it. And it handed down its final decision to bar the merger in May, still insisting the merged entity would lessen competition. Vodafone and TPG have appealed the decision, which is why they are all now in court.

Both Vodafone and TPG have done their best to plead “poor me”, contradicting their own corporate rhetoric about how wonderful they normally are. Without this merger competition will lessen, they will both continue to flounder and everything will cost more for the poor consumers, of which they are the supposed champions.

The “poor me” sentiment may well be true in the case of Vodafone Australia. Itself a result of the merger with the then fourth mobile operator, “Three”, in 2009, it is owned 50/50 by global telco, Vodafone PLC, and Hutchison Whampoa Limited, a Hong Kong based conglomerate with revenue in excess of U$55 billion. Vodafone Australia has a chequered history of poor customer services, massive network failures and has generally been an “also ran” with around 20% of the mobile market. It’s been looking for someone to merge with for a long time.

But where it gets really interesting is where the ACCC is arguing if the merger does not go ahead, as it wants, then TPG will reverse its earlier decision and build a mobile network because it has no other choice. Even the very best efforts of Michael Hodge, QC and hero of the Royal Banking Commission hearings, will have a really hard time convincing the judge of that.

As it stands, the merger between TPG and Vodafone makes sense in as much as they have complementary services, with a lot of opportunities to cross-sell without cannibalisation. The ACCC’s argument that four mobile networks is better than three is threading a fine line between fulfilling its charter of ensuring competition works to the benefit of consumers and meddling too closely with industry participants’ business operations.

And what would happen if the ACCC does win, and then TPG does not build a mobile network? Would it then not have a perfectly valid reason for an appeal? And where would it leave Vodafone, still at the altar looking for a partner. What if the no. 5 telco, Vocus, comes calling? Those two have been sniffing each other for years.

And in the galleries Telstra and Optus are quietly observing how two of their competitors are squirming in their seats, while going about their own business, probably not too worried about either, merged or otherwise.

Kim Wingerei is a former business-man, turned writer and commentator.  Follow @ / Twitter @kwingerei

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