TPG, Vodafone to become one in $15 billion merger

Vodafone and TPG have been given the green light for a massive merger, but that doesn’t mean you’ll be paying any less on your bill.

Two of Australia’s biggest telcos will be allowed to merge after successfully appealing against a decision by the consumer watchdog.

TPG and Vodafone will be allowed to become one company, combining their considerable market shares in fixed line broadband and mobile respectively to challenge Telstra and Optus.

Justice John Middleton delivered the decision in the Federal Court this morning, after a three-week hearing in September last year.

He said the merger wouldn’t substantially reduce competition and so there was no legal reason it couldn’t go ahead.

“It is extremely unlikely and there is no real chance that TPG will roll-out a retail mobile network or become an effective fourth mobile network operator in the relevant future,” Justice Middleton said in the ruling.

The Australian Competition and Consumer Commission (ACCC) opposed the merger because it believed TPG would build its own network.

The ACCC now has four weeks to lodge an appeal against the judgement, which it said it is “carefully considering”.

ACCC chair Rod Sims said the decision is a loss for customers, who could face higher prices.

“Australian consumers have lost a once-in-a-generation opportunity for stronger competition and cheaper mobile telecommunications services with this merger now allowed to proceed,” Mr Sims said in a statement following the decision.

He cited the industry’s initial welcoming of the merger as a reason mobile data prices could become higher.

But a merger could also be good news for consumers.

TPG and Vodafone will become one after the ACCC decision to block a merger was overruled in court. Picture: AAP Image/Dan Himbrechts

The decision comes more than a year after the ACCC first raised concerns. Picture: Ben Stansall/AFP

The combined strength of Vodafone and TPG could allow them to better compete with bigger companies Telstra and Optus, placing pressure on their prices as they compete with the new company.

TPG and Vodafone combining their respective strengths was a key part of their argument about why they should be allowed to merge.

What this means for TPG and Vodafone customers still remains to be seen, as we don’t yet know what a merged company will look like, or even what it will be called.

A merger would likely also impact iiNet and Internode customers as both of those companies are owned by TPG.

Some of TPG and Vodafone’s competitors have commented on the deal.

An Optus spokesperson told news.com.au the company respects the court’s decision (implying it doesn’t necessarily agree with it) but won’t spend too much time thinking about it.

“Optus is an advocate for competition. Consumers want telcos to compete and challenge. We will continue to focus on our business, 5G differentiation, evolving our premium national network, and delivering exceptional value, must-have content and great service for customers.”

The founder of MVNO Boost Mobile Peter Adderton was a bit more outspoken, saying the “dynamic of the telecommunications industry has changed permanently over the last 48 hours”, after a similar merger between two US telcos was approved as well.

“The ACCC was fighting to keep a fourth network that never actually existed in reality,” Mr Adderton said.

“It was a promise by TPG that pushed prices down, but as I have said before, their intention was never to actually go through with a network build. [TPG executive chairman] David Teoh is the ultimate telco poker player, who played the game and some key industry players masterfully and got done what he needed to. I can also see him wanting to have more control of this combined business and I don’t see Vodafone having any appetite to oppose this either.”

Mr Adderton said the ACCC had failed to ensure protections for companies like his who will become the “fourth mobile network” he claims TPG was never really going to build.

“The sad part of today’s decision is the opportunity that the ACCC had to put some conditions around the merger that would have helped protect MVNOs, who will now effectively be the fourth virtual network... keeping the bigger guys honest is really important for Australian consumers and competition more broadly.

“Ultimately, the ACCC was right in that having a fourth network is better for consumers. The problem has always been that TPG was never really going to be this fourth network, so it is up to Boost and the MVNOs to keep the bigger guys honest, and we must continue to push the envelope and be that value play for consumers.”

Boost Mobile Founder Peter Adderton said the ACCC needs to protect MVNOs as the “fourth mobile network” that already exists rather than focusing on one he thinks TPG was never really going to build.

Smaller player Macquarie Telecom, which deals with business and government customers, also had plenty to say.

“This decision will only worsen the lack of competition, which has meant our industry continues to underserve and overcharge customers,” Macquarie Telecom CEO David Tudehope said.

He said the telecommunications industry risked losing its “social licence” if it didn’t serve customers better.

“Now that the decision has been made to allow the merger to go ahead, the Government and ACCC will need to reconsider how to improve retail and wholesale competition in mobiles.”

He said the amount of complaints the telco industry receives compared to those made against the banking and finance sectors (almost twice as many), even after the bruising Royal Commission exposed widespread misconduct in that sector, was proof of how poorly the industry is viewed by the consumers it serves.

As you’d expect, TPG and Vodafone both welcomed the decision.

“It’s been 18 months since we commenced the approval process for this merger and we’re very keen to move forward,” Vodafone Hutchison CEO Iñaki Berroeta said in a statement.

“The more quickly the merger can proceed, the faster we can deliver better competitive outcomes for Australian consumers and businesses.”

He added the delay had delivered a series of “free kicks” to the company’s competitors, but now it was consumers who would benefit.

“For the first time, Australia will have a third, fully-integrated telecommunications company. This will give us the scale to compete head-to-head across the whole telecoms market which will drive more competition, investment and innovation, delivering more choice and value for Australian consumers and businesses,” Mr Berroeta said.

TPG and Vodafone expect the merger should be completed by mid-2020.

Vodafone CEO Iñaki Berroeta said the merger will increase competition, not lessen it. Picture: Damian Shaw

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HOW DID WE GET HERE?

The ACCC first showed interest in the proposed merger between Vodafone Hutchison Australia and TPG Telecom in December 2018.

About the same time, a joint venture between Vodafone and TPG called Mobile JV bought $263 million worth of spectrum at the most recent auction for the frequencies that carry your mobile data and phone calls.

A few months later in May of last year, the ACCC announced they would oppose the $15 billion merger on the grounds that it would cause further consolidation in Australia’s already “very concentrated mobile phone market”.

The ACCC raised concerns that Telstra, Optus and Vodafone, who together operate the three competing mobile phone networks, held 87 per cent of the market.

Similarly, Telstra, Optus and TPG dominated the fixed line broadband market with 85 per cent share between them.

The networks operated by the three telcos also support mobile virtual network operators (MVNOs), such as TPG’s mobile product.

MVNOs buy wholesale access to mobile phone networks then sell it on to their customers, a bit like the way the national broadband network operates.

TPG switched from Optus to Vodafone in 2015.

The company had sought to get out of the MVNO game by building its own 4G network, but said it abandoned those plans after the federal government banned the use of Huawei technology.

The telco said that ban made building a network too expensive.

It later emerged in court that the network was so prized by TPG’s reclusive billionaire boss David Teoh that the company made last minute adjustments to financials in order to secure funding.

TPG executive chairman David Teoh’s day in court finally gave news photographers a chance to get a more up to date photo of the notoriously private billionaire. Picture: David Geraghty/The Australian

Over the course of a weekend, the proposed value of the network was changed from negative $290 million to a positive $779 million by increasing the amount of customers it expected to acquire each month from 45,000 to 60,000, lowering its cost of capital, and extending its time frame from seven to 12 years.

The changes were made to secure a Macquarie Bank-led capital raise.

The bank only wanted to raise the funding if the network had a positive value.

This revelation and others relating to Mr Teoh’s running of TPG, including a startling lack of written documentation, revealed a seeming dictatorship within the company.

In the aftermath of his court appearance, Mr Teoh was painted as leading an army of “yes men” who supported the ambitious and seemingly ad hoc decisions he made without much scrutiny.

“We are not that bureaucratic,” Mr Teoh told the court. “We are very agile, and sometimes we do things and we meet frequently and we talk frequently. So things are moving very fast in the company.”

When asked by the ACCC’s counsel Michael Hodge QC if anyone on the TPG board, which includes Mr Teoh’s son Shane, asked why there was no business plan to support spending $900 million on spectrum for the proposed network, Mr Teoh said no one asked because they trusted him.

“I have the trust of my board. So that is a very important factor,” he said in court.

Mr Teoh also told the court the network wasn’t abandoned because of the cost of buying other equipment, but because TPG wouldn’t be able to upgrade it to 5G in the future due to a lack of spectrum.

The ACCC’s decision to block the merger largely hinged on its opinion that TPG would go ahead and build a fourth mobile phone network in Australia anyway if they were prevented from merging.

This would increase competition and place further downward pressure on prices for consumers, in the eyes of the ACCC.

TPG and Vodafone both disputed this, and in fact claimed they were too weak to compete with Telstra and Optus unless they were allowed to merge.

They argued that a merger would create a stronger company better able to compete with the two bigger telcos, which would be better than two weaker companies fighting over the scraps.

Both companies were placed in a trading halt on the ASX this morning in the lead-up to the decision.

What do you think of the decision? Let us know in the comments below.