TPG-Vodafone to lose ACCC appeal, tips Venture Insights

A bid to overturn the ACCC’s veto of the $15bn TPG-Vodafone tie-up will likely fail, says Venture Insights.

TPG and Vodafone will struggle to convince the Federal Court that they can’t compete in the market without the merger, according to Venture Insights’ Nigel Pugh.

TPG Telecom and Vodafone Australia’s $15 billion merger is unlikely to see the light of day, with the Federal Court tipped to back the competition regulator’s rejection of the deal, according to analyst firm Venture Insights.

Venture Insights predicted the Australian Competition and Consumer Commission’s initial rebuff of the TPG-Vodafone tie-up and managing director Nigel Pugh said that the subsequent appeal lodged by the telcos is going to fall on deaf ears.

According to Mr Pugh, the telcos will struggle to convince the Federal Court that they can’t compete in the market without the merger.

TPG (TPM) claims it is not likely to build a 4th network and the ban on using Huawei’s 5G equipment has diminished its chances of rolling out a new mobile network. Meanwhile, Vodafone Australia has warned that a tight balance sheet and future network congestion, along with the Huawei ban, will reduce its ability to act as a viable third mobile operator.

However, Mr Pugh said both claims are overstated.

“In our analysis, the application of the ACCC’s no merger position (arguably) shows that TPG would be likely to build a competitive fourth network — even if it had to incur a premium to change vendors,” he said in a report.

“In the case of no merger, we expect Vodafone will continue its business in Australia and launch 5G services,” he added.

Venture Insights’ forecast is based on two key points. Firstly, having paid $1.2 billion for mobile spectrum, TPG will be better off pushing ahead with a more expensive mobile rollout than selling the spectrum back to the market. It adds that a large portion of the costs will be driven by passive infrastructure (civil works, building towers) rather than buying more expensive equipment.

Meanwhile, despite its balance sheet issues, Vodafone Australia is a cash generative business.

“They have a ~30 per cent EBITDA margin and their statement of claim shows that the business is cash flow positive in years where there aren’t material capex requirements,” the report said.

If the telcos fail to resuscitate the deal, the Venture Insights report suggests they may need to offer some concessions to the regulator.

“Given the delays and risks for VHA/TPG, we believe they need a Plan B — such as an undertaking around a competitive, open access 4G/5G MVNO 5-year pricing offer.”

“Finally, given the level of industry consolidation, we believe future industry mergers will continue to pose regulatory problems and, we expect to see a focus on infrastructure mergers moving forwards with the retail business separated as a MVNO/ RSP,” he added.

The case is scheduled to be heard in September.