Vodafone, TPG propose 'merger of equals'

One is more equal than the other, but deal makes sense as NBN rollout continues

One of Australia's most acquisition-hungry telcos, TPG, is to merge with mobile carrier Vodafone Australia.

It's spun as a “merger of equals”, which is nearly true: TPG will own 49.9 per cent of the new TPG Telecom Limited, while Vodafone Group and Hutchison (the international businesses who own Vodafone Hutchison Australia, local operator of the Vodafone brand) will hold 50.1 per cent.

The biggest individual shareholder in the new business will be telco mogul David Teoh, whose 17.12 per cent share will be worth around AU$2.57 billion of the $15 billion business.

Of the predicted $6 billion annual revenue, Vodafone will contribute $3.57 billion (and earnings just over $1 billion) and TPG $2.5 billion ($839 million earnings).

Teoh will be non-executive chairman of the new company, while Vodafone's current CEO Inaki Berroeta will be CEO and managing director.

From the point of view of their operations, the merger makes sense: TPG has only a tiny mobile market share, but is the number two fixed broadband provider (with 1.9 million subscribers). While the NBN will make TPG's extensive DSLAM network obsolete, that footprint will give it an edge retaining customers as they transition to NBN connections.

TPG also claims 22,000 km of metro and long-haul fibre serving its own and the NBN's points of presence, “thousands” of on-network buildings, and its own international links (a cable to Guam, plus capacity on the Australia-New Zealand-USA Southern Cross cable).

Vodafone, a customer of TPG's dark fibre to connect some of its base stations, has 5,000 sites, and around 6 million mobile subscribers on its LTE network.

More than once, Vodafone has toyed with becoming an NBN retailer, but never got beyond a 2017 market test. In preparation for an eventual launch, Vodafone had connected to 91 of the 121 NBN points of interconnect.

The merger will also bulk up Vodafone's 156 MHz of mobile spectrum with TPG's little-used 40 MHz slice, bringing it close to Telstra's 217 MHz (Optus is far out in front of the mobile market in spectrum holdings with 334 MHz).

With the Australian government offering 125 MHz of 3.6 Ghz-band mobile spectrum ahead of the deal's completion, TPG and Voda have created a joint venture to take part in the auction, due to begin in November 2018.

As part of the deal, TPG is to split off its Singaporean mobile business. ®

Bootnote: Readers outside Australia should take note that TPG Telecommunications is not related to the US private equity company of the same name.

The Australian TPG was founded in the 1980s by David Teoh, originally as a distributor and sometimes manufacturer called Total Peripherals Group. Having bought Chariot, a struggling ISP, in 2007, it gained heft as a telecommunications service provider in 2008, when it acquired a collapsing telco called SP Telecom.

The following year, TPG bought dark fibre operator PIPE Networks (giving it both metro and the PPC-1 international fibre); it acquired another fibre owner, AAPT, in 2013; and broadband competitor iiNet greatly expanded its DSL infrastructure footprint in a 2015 transaction.

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