Court gives green light to $15 billion TPG-Vodafone merger

Australia's competition watchdog laments the loss of a "once-in-a-generation opportunity" for mobile consumers, but the Federal Court sees TPG rolling out its own network as a lost cause and is in favour of establishing a viable contender through a merger to take on Telstra and Optus, even if it leads to greater market concentration.

The Australian Competition and Consumer Commission (ACCC) claims the public have lost out after a Federal Court ruled in favour of a $15 billion merger between two of the country's major telcos today.

The watchdog opposed the merger between TPG Telecom (ASX: TPM) and Vodafone last May on the grounds it would disincentivise TPG's aggressive pricing strategy and the rolling out of its own mobile network.

But Justice Middleton of the Federal Court concludes the merger would not reduce competition, giving Vodafone the declaratory relief sought so that a scheme implementation deed for the combination can proceed. .

"Back in 2017, there was a moment in the affairs of TPG and Mr Teoh (the guiding force behind TPG) for a business opportunity to be taken to roll-out a retail mobile service," Middleton said.

"That moment has passed. To now leave TPG and Vodafone in their current state will not promote competition in the retail mobile market.

"A merger would not now, and would not likely in the relevant future, substantially lessen competition in the supply of retail mobile services in Australia."

The deal will be a "merger of equals" whereby TPG shareholders will own 49.9 per cent of the new entity and Vodafone Hutchison Australia (VHA) shareholders will own the remaining 50.1 per cent. VHA is owned 50-50 by British company Vodafone Plc and locally listed entity Hutchison Telecommunications Australia (ASX: HTA).

When the merger was announced in August 2018 TPG still had plans to roll out a 5G network, but in January 2019 - at a time when the ACCC's concerns were already public - TPG abandoned the idea due to the government's ban on Chinese telco Huawei in the country's networks.

The hope that TPG will ever roll out its own network is now a lost cause in the eyes of Justice Middleton.

"It is extremely unlikely and there is no real chance that TPG will roll-out a retail mobile network or become an effective competitive fourth mobile network operator ('MNO') in Australia in the relevant future," he said.

"When I refer to there being no real chance I mean that there is no commercially relevant or meaningful real chance that TPG will roll-out a retail mobile network or become an effective competitive fourth MNO.

"Then, Vodafone itself is facing, and will face, constraints in trying to compete with Telstra and Optus in the retail mobile market."

The judge concludes a merger between the two will mean both companies are enhanced and will be a stronger competitive force against Telstra and Optus.

"It is not necessarily the number of competitors that are in the relevant market, but the quality of competition that must be assessed," he said.

"Further, it is not for the ACCC or this Court to engineer a competitive outcome. The only question for this Court is whether the merger would have the effect, or be likely to have the effect, of substantially lessening competition in the supply of retail mobile services in Australia."

Vodafone Hutchison Australia (VHA) has welcomed the decision, claiming it will work with TPG so that the benefits can flow to Australian consumers.

VHA chief executive officer Iñaki Berroeta says the deal will allow for a greater investment in next generation networks including 5G.

"It's been 18 months since we commenced the approval process for this merger and we're very keen to move forward and deliver these benefits as soon as possible," he said.

"We have ambitious 5G rollout plans and the more quickly the merger can proceed, the faster we can deliver better competitive outcomes for Australian consumers and businesses."

Berroeta says the lengthy process to obtain competition approval for the merger and the Huawei ban have both given "free kicks" to competitors for some time.

He says the spectrum holdings of the merged company would increase Vodafone's network capacity and scope for further investment.

"For the first time, Australia will have a third, fully-integrated telecommunications company," he says.

"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."

TPG also welcomed the decision, and both parties expect the merger should be completed in mid-2020, subject to the remaining regulatory and shareholder approvals as well as any appeal by the ACCC.

"TPG is very pleased with the Federal Court decision and looks forward to combining with VHA to create Australia's newest fully integrated telecommunications operator," says TPG executive chairman David Teoh.

"We will work to finalise the other conditions to the merger as soon as possible."

"Once-in-a-generation opportunity" lost

The court has essentially determined competition is best served by strengthening mid-tier players, even if it comes at the cost of greater market concentration. 

But the ACCC is more optimistic about what TPG could have achieved in the absence of a merger, given it had already spent $1.26 billion on the spectrum needed to build a mobile network, has an extensive transmission network, a large customer base, and well-established brands in TPG, iiNet and Internode.

The ACCC also believes TPG has the ability and incentive to overcome technical and commercial challenges.

"Australian consumers have lost a once-in-a-generation opportunity for stronger competition and cheaper mobile telecommunications services with this merger now allowed to proceed," ACCC chair Rod Sims said.

"Mobile telecommunication services are integral to Australia's social and economic future and Telstra, Optus and Vodafone already control almost 90 per cent of the market. There is clear evidence that consumers pay more when markets are concentrated.

"The ACCC's concern was that with this merger, mobile data prices will be higher than they would be otherwise. These concerns were reinforced by statements from the industry welcoming the merger and the consequent "rational" pricing."

The ACCC is successful in more than 80 per cent of the consumer and competition law cases it brings. It opposes mergers in a range of markets every year, with very few such decisions challenged in court.

"We will continue to oppose mergers that we believe will substantially lessen competition, because it's our job to protect competition and, in doing so, ensure that Australian consumers enjoy the benefits of competition," Sims said.

"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."

In response to the court decision, Macquarie Telecom CEO David Tudehope claimed it meant the telco industry now risked losing its social licence.

"This decision will only worsen the lack of competition, which has meant our industry continues to underserve and overcharge customers," he says.

"Now that the decision has been made to allow the merger to go ahead, the Government and ACCC will need to reconsider how to improve retail and wholesale competition in mobiles.

"The telco industry gets twice the number of complaints to the Telecommunications Industry Ombudsman (TIO) as the banking industry's Australian Financial Complaints Authority (AFCA), its new Ombudsman, even after the Royal Commission."

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