TPG-Vodafone Merger Case- First Day Hearing

The Case

The TPG-Vodafone merger case is a hot topic of discussion this week. The proposed merger between TPG Telecom Limited (ASX:TPM) and Vodafone Hutchison Australia worth $15bn was opposed by the Australian Competition and Consumer Commission (ACCC) in May 2019. ACCC, in Australia, encourages competition as well as impartial trade in markets that is in the best interest of consumers and businesses, as well as the community.

Owing to the opposition from the Commission, both the companies had challenged the decision of ACCC in the Federal Court.

Background

Last year on 30 August 2018, ACCC announced that it would review the proposed merger between TPG and Vodafone Hutchison Australia and analyse the competitive impact on mobile services. The review would also consider the impacts on the related markets like wholesale services, mobile roaming and spectrum acquisition.

In December 2018, ACCC raised its concern regarding the merger of TPG and Vodafone. ACCC Chairperson Rod Sims stated that TPG was on track to become the 4th mobile operator in Australia and would be an aggressive competitor, and three were concerns that eliminating TPG as a new independent contestant with its network would reduce competition in the market. ACCC believed that in case TPG remained separate from Vodafone, it could adopt an aggressive price strategy and offer mobile plans at a cheaper rate along with large data allowances.

With the proposed merger, TPG as well as Vodafone would not have the benefit to function in the similar manner. Also, with the reduction in the number of players in the mobile market from four to three, prices would increase and there would be less innovative plans for mobile customers.

ACCC also scrutinised the impact of eliminating Vodafone Hutchison Australia as a competitor in the fixed broadband market and the commission believed that Vodafone is a small player in the fixed broadband market, but at the same time bears potential to become a strong competitor, driven by its high level of brand recognition and the prevailing client base.

In the long term, ACCC considered that the proposed merger would result in increased acceptance of mobile broadband services rather than fixed home broadband services after the roll out of 5G technology.

On 8 May 2019, ACCC opposed the merger between TPG Telecom Limited (ASX: TPM) and Vodafone Hutchison Australia Pty Ltd (ASX: HTA) on the grounds of a concentrated mobile services market in Australia. The 3 network operatives- Vodafone, Telstra and Optus have more than 87% share in Australia. TPG, Telstra and Optus hold ~ 85% share in the fixed broadband market.

ACCC believed that the proposed merger would slump competition as well as contestability in this segment. It would also result in less competition in the supply of mobile services, as it might provide a hindrance in the way of TPG from entering Australia as the fourth network operator.

Recently, Mr David Teoh, the Executive Chairman of TPG Telecom Limited was supposed to appear in the court. It was expected that on 11 September 2019, Mr Teoh would take a stand and Mr Michael Hodge, the barrister for this case, would examine if Mr Teoh planned to continue building his unfinished, unused mobile network or not.

Moreover, Mr Inaki Berroeta, CEO of Vodafone Hutchison Australia, who brought back the company on track after the tough phase of persistent network failure, would appear for the court’s hearing. Although the company is not making profits, Mr Berroeta’s efforts were appreciated as he was able to make Vodafone Hutchison Australia a well-known and reliable carrier in Australia. These potentials would earn him a chief executive-ship of the merged company, TPG. On the other hand, Mr Teoh would be the non-executive chairman of the new entity.

Mr Teoh’s intention would remain under surveillance during the period. Thankfully, Mr Berroeta would remain free from that. Vodafone has a small NBN resale business, and it was agreed by ACCC that fixed-line broadband would be excluded from this case, and the focus would be on the mobile retail market. Thus, in this case, the entire light would be on TPG’s intention, whether it still has mobile ambitions. From ACCC, Chairman Mr Rod Sims would not be appearing for the court’s hearing. From ACCC, Mr Patrick Smith would be the key expert witness. He is the partner of London firm RBB Economics, which provides guidance on competition law and has appeared in court as an expert witness for other merger cases.

From TPG and Vodafone, Mr Ian Martin, an eminent analyst with New Street Research, would be the key expert witness.

Justice Mr John Middleton would be the presiding judge in this case. He holds tremendous understanding in judging competition cases and from 2009 to 2016 he was the Deputy President of the Australian Competition Tribunal.

First Day Hearing

On 10 September 2019, the first day of the hearings, Mr Inaki Berroeta highlighted that the health of his business was positive, and he resisted ACCC’s argument that telco was not required to merge with TPG to compete with competitors like Telstra and Optus.

ACCC, in the initial hearing, stated that Vodafone had a healthy business, capable of matching its rivals. Federal Court Justice Mr John Middleton was told that both the companies, Vodafone and TPG, were strong enough to individually compete. However, the merger of these companies would provide them with too much market power and lock in a telecom market which would be under the control of three super telecommunication companies.

However, Mr Berroeta resisted the ACCC statement stating that the company strength had been optimistic and disagreed on the claims that it had similar spectrum holdings to Telstra as well as Optus. He also stated that ACCC needed to demonstrate ways in which the TPG and Vodafone merger would cause a decline in the competition in the mobile retail market.

Ms Catherine Button, QC, who is the ACCC’s counsel pitched in to highlight the technical issues based on the evidence and advised that Vodafone had more spectrum per customer in metropolitan markets than its bigger competitors like Telstra and Optus.

However, Mr Berroeta disagreed to this calculation, based on the statement of ACCC’s witness Mr Mike Wright that Telstra and Optus had more spectrum per customer than Vodafone and TPG. Mr Berroeta opposed Dr Button when she failed to explain the numbers provided by Mr Wright. However, she stated that the report provided by Mr Wright was confidential, and the figures were not supposed to be checked. She also referred to the Director’s report of Vodafone from December 2018 and highlighted that Vodafone would get into a merger with TPG as a strong standalone company. However, Mr Berroeta stated that the statement is more of an aspirational outlook, and ACCC believed that the proposed $15bn TPG and Vodafone merger would result in declining the competition as well as contestability in this sector. In July 2019, Vodafone had reported a loss of $153.4mn in its half yearly results.

After an hour of cross-examination, certain commercially sensitive details were discussed after the public stepped out from the court room.

On 12 September 2019 (AEST 01:59 PM), the stock of TPM was trading at $7.020, with a market cap of $6.48bn, while the HTA stock was trading at $0.125, with a market cap of $1.7bn.

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