Vodafone and TPG win appeal for $15bn mega merger

The Australian Federal Court has overturned a decision by the Australian Competition and Consumer Commission (ACCC), paving the way for Vodafone and TPG to create a converged telco giant.

The ACCC had originally opposed to decision on the grounds of weakened competition, believing TPG would create a mobile offering while Vodafone would expand its broadband offering independently, however the courts disagreed. Both the telcos argued the financials did not add up to pursue convergence strategies independently, with the courts now greenlighting an AUS$15 billion merger after an 18-month wait.

Vodafone and TPG have said the merger is set to be complete by mid-2020, subject to approvals from other regulators and other shareholders, as well as the likely appeal from the ACCC.

“The ACCC’s concern was that with this merger, mobile data prices will be higher than they would be otherwise,” said ACCC Chair Rod Sims. “These concerns were reinforced by statements from the industry welcoming the merger and the consequent ‘rational’ pricing.

“We stand by our decision to oppose this merger. If the ACCC won 100% of the cases we took it would be a sign we weren’t doing our job properly; by only picking ‘safe’ cases and not standing up for what we believe in. The future without a merger is uncertain. But we know that competition is lost when main incumbents acquire innovative new competitors.”

Theoretically, the ACCC has a point, but it has been ignoring some very significant factors. Firstly, deploying a mobile network in a country so vast as Australia is incredibly expensive. Secondly, in banning Huawei as a supplier of RAN equipment, TPG’s business case was undermined. And finally, introducing additional competition and encouraging a race to the bottom does not necessarily create a healthy and sustainable telco industry.

TPG has said continuously over the last few months that without being able to work with Huawei the commercials of deploying a mobile network do not add up. On the increased competition, India and Italy are two markets which have demonstrated more competition and decreased tariffs can eventually lead to a very difficult position.

While it is not guaranteed, there is hope this merger could end up being a positive for the Australian telecommunication market. A merged entity could provide more competition for the Telstra and Optus pair who are leading the market share rankings. Both of these telcos are able to entice customer with bundled service offerings, something which is becoming increasingly popular in the eyes of the consumer. The merged Vodafone and TPG proposition can now theoretically compete on a more level playing field.

“For the first time, Australia will have a third, fully-integrated telecommunications company,” said Vodafone Australia CEO Iñaki Berroeta. “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.”

Competition is certainly not balanced in the Australian market currently. Increased competition might well fragment the market further, creating a ‘divide and conquer’ strategy for Telstra. It might have created more value for the consumer, as the ACCC so strongly insists, but it might have also worked out for Telstra, giving it a stronger position as market share is dwindled for the smaller players.

This ruling by no means guarantees the long-term health of the Australia telco industry, but it does create three converged players, perhaps the most logical position in the pursuit of sustainability.