Vodafone paints bleak picture of financial future without TPG merger

VHA says it will struggle to combat congestion on its mobile network unless the merger is allowed to go ahead

Court documents filed by Vodafone Hutchison Australia claim that the telco’s shareholders – VHA is owned 50 per cent by Vodafone and 50 per cent by Hutchison Telecommunications Australia – are unlikely to receive a dividend from their investment in the business over the next five years “if ever”, if a proposed merger with TPG is blocked.

VHA launched Federal Court action after the Australian Competition and Consumer Commission (ACCC) said it opposed the two telcos merging. The court action is supported by TPG.

Documents filed with the court by VHA says that absent a merger between it and TPG, VHA’s financial position is “not likely to improve materially” over the next half-decade.

The telco has reported steady growth in revenue over the last few years, but it yet to turn a profit. However, its losses have narrowed: In the 12 months to 31 December 2018, VHA registered a loss of $124.4 million, down from $177.8 million (without AASB 15 accounting adjustments, the 2018 loss would have been $103.4 million).

The ACCC argues that if the merger goes ahead it would be a blow to competition in the telco market. In particular, the commission says that without a merger, TPG is likely to be compelled to roll out a mobile network to compete with VHA, Telstra and Optus.

TPG previously began rolling out a mobile network but earlier this year announced it was dumping the project. The TPG decision came in the wake of the ACCC expressing unease about a TPG-VHA merger, although TPG didn’t cite that as a factor. Instead it blamed the government’s Huawei ban, which it said would leave it with a network that had no viable upgrade path to the new 5G standard.

VHA plans to argue in court that it and TPG aren’t currently strong competitors in a number of areas, and are unlikely to become so even without a merger: VHA does not expect to become a “significant competitor” in the fixed-line broadband market, and it does not believe TPG will become a significant mobile player.

VHA also says that without a merger it will be less likely to be able to compete with Telstra and Optus.

In its court filing VHA said that the “increasing number” of congested sites on its mobile network has “affected adversely the quality of the retail mobile services it supplies (measured in average speed) relative to that of Telstra and Optus in recent years.”

If the TPG merger does not go ahead VHA would be faced with the need to either upgrade the radio access network (RAN) portion of its mobile network or purchase additional spectrum. It is uncertain whether it will be possible to purchase additional spectrum licences, VHA argues.

Without a merger, however, VHA will also struggle with funding an upgrade of its RAN to address congestion, which is likely to affect the “quality and value of the retail and wholesale mobile services” it supplies.

VHA and TPG are not “close competitors” in the wholesale and retail mobile markets, and the retail fixed-line broadband market, the court filing says. In their merger announcement, TPG and VHA argued that their respective strengths in the fixed and mobile arenas would complement each other in a merged entity.

VHA says that it is unlikely TPG will roll out its own mobile network or through some other means become a “significant competitor” in the retail mobile or wholesale mobile markets.

VHA is seeking to have the court declare that a merger with TPG “would not have the effect, and would not be likely to have the effect, of substantially lessening competition in any market”. It also wants the ACCC to pay the costs of the VHA action.

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Tags VodafoneTelecommunicationsTPGVodafone Hutchison Australia (VHA)Australian Competition and Consumer Commission (ACCC)

More about AustraliaAustralian Competition and Consumer CommissionHuaweiHutchisonOptusVHAVodafone

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