‘Mergers don’t fail because of culture’: The lessons TPG’s boss has learned from Vodafone tie up

When former Vodafone Australia boss Iñaki Berroeta finally completed the $15 billion merger between the mobile operator and TPG Telecom after it protracted a two year court battle, it took place against a backdrop few could have predicted. COVID-19 was spreading rapidly around the world, and while Australia appeared to have sidestepped the worst of it, the Spanish executive was locked at home as he began the daunting task of combining the two companies.

Now, as he celebrates the one year anniversary of that blockbuster deal finally closing, Berroeta is again locked at home with one dose of the AstraZeneca vaccine in his arm, and awaiting the second.

One year on, TPG Telecom boss Inaki Berroeta says he is in a better place than he expected.Credit: Louie Douvis

The COVID-19 pandemic rocked the entire economy, and underpinned wild swings in financial markets. But TPG has been hit particularly hard by it. Analysts say its mobile business is more reliant than Optus and Telstra on international travellers and returning expats who typically use Vodafone when they arrive in Australia but are now shut out due to border closures.

But it wasn’t just the pandemic that rattled the confidence of TPG Telecom investors over the past 12 months: the unexpected resignation of the telco’s reclusive chairman and founder, David Teoh, a shareholder favourite, also rattled the market. TPG shares have fallen by about 29 per cent over the past year, compared to a surge of more than 20 per cent for the benchmark ASX/200 index.

Despite the setbacks, Berroeta says the past year has still been better than expected for what is now Australia’s second biggest listed telco. “There are a number of things that have come really quickly together,” he says. “The first is the excitement around the team. The other thing is our 5G rollout. I’m very happy with the progress.”

Mr Berroeta says he has executed on a number of his objectives - growing TPG’s share of the ‘entertprise’ market for big corporate clients, launching its fixed wireless products and edging towards $70 million in cost savings projected in calendar year 2021. The integration of TPG’s spectrum and small cell equipment into Vodafone’s network, which the company says will increase mobile speeds, was also achieved.

He also says he is happy with his efforts to combine the cultures of two disparate companies. TPG under Teoh was famous for its ruthless approach to costs, Vodafone had a different image as one of the country’s better known consumer brands. “Mergers don’t fail because of culture, they fail because of lack of attention to the culture and what we are doing is putting a lot of attention into it,” he says.

The starting conditions for the new TPG Telecom were less than desirable. MST Marquee telecommunications analyst Fraser McLeish says the odds were stacked against the telco from the start due to delays from its lawsuit with the Australian Competition and Consumer Commission.

“It’s been hard for the merger because it got delayed by the ACCC and then you had COVID-19,” Mr McLeish says. “Vodafone has been the most impacted by border closures both from mobile roaming - which all of the operators are impacted by but a greater proportion of their postpaid customers tend to be from migration or expats returning.”

“The rationale for the merger is still sound, but they’ve been a bit unlucky on some of those factors.”

Telco analyst Ian Martin agrees the financial performance of the company would be very different if the merger took place when it was first unveiled in 2018.

“The expectations were too high at the time. People naturally thought that the merged company would look more like what TPG had achieved under David Teoh,” he says. “It’s a very different business. What we’ve seen over the last year is the reality of the merger has been better understood by the market.”

But Mr Martin thinks next month’s results will show TPG Telecom has been able to lay a solid foundation. And provided international travel picks up next year, he expects some sort of recovery for its mobile business.

“The real benefits of the merger are long term - they’re about how you built out fibre, more cell towers, expanding the 5G network and get into the enterprise market,” he says. “There’s a lot of groundwork that has got to be done in rolling out those towers and the fibre infrastructure...but you won’t see the benefits of that this year. It’s hard to see until their half year results in another few weeks, but don’t see why they wouldn’t [have achieved that foundation].”

ACCC chairman Rod Sims suffered a bruising loss in the courts when the merger was approved but does not appear to have let go of the issue. He took aim at TPG Telecom again several weeks ago, this time suggesting the merger had caused price hikes across the sector.

Mr Berroeta says the telco still implements discounts, but the company has successfully started providing more value for a higher price by getting customers to use more TPG products. More than 60 per cent of iiNet mobile customers have migrated to Vodafone’s mobile network.

“If you are an iiNet broadband customer, because of the merger you get the opportunity to have access to a much richer portfolio of products,” he says. “We also have handsets which is something that iiNet was never offering to customers. That is really the way we are capturing a bigger share of the telco spend of that particular customers but doing that through giving the customer more value.”

Mr McLeish says he would like to see TPG grow the amount of people paying for its fixed wireless products. TPG’s 5G fixed wireless services were rolled out from June.

“The whole off-net, on-net strategy was really what TPG was founded on originally and it’s added a lot of value to TPG shareholders,” he says. “I think that’s a key opportunity for them and a key area of value upside.”

Mr Martin says TPG Telecom needs to continue to focus on merger cost savings, growing its mobile customers and increasing its share of the enterprise segment (which refers to big corporate customers).

With billionaire Hong Kong business titan Canning Fok now entrenched as chairman, Berroeta says he is very happy with the new board and its involvement in directing the company. But McLeish says work still needs to be done to provide assurances to shareholders.

“Iñaki is the CEO, so there’s continuity from that point of view,” McLeish says. “But a lot of the shareholders were in TPG to back David to some extent, and so that is a loss and TPG is going to have to build back up that shareholder following again.“