VHA and TPG confirm merger plans; ink joint venture agreement for upcoming 5G auction

30 Aug 2018

British telecoms giant Vodafone Group has announced that Vodafone Hutchison Australia (VHA) and TPG Telecom (TPG) have agreed a merger which will see the establishment of a new fully integrated telecoms provider (dubbed MergeCo). In a press release confirming the development, Vodafone suggested the tie-up would accelerate the benefits of the substantial network investments made by both companies, and suggested the enlarged entity would be ‘a more powerful challenger to Telstra and Optus in Australia, with an integrated fixed and mobile offering’.

Under the terms of the deal Vodafone Group and Hutchison Telecommunications (Australia) Limited (HTAL) will each own an economic interest of 25.05% in MergeCo, with TPG shareholders owning the remaining 49.90%. MergeCo will be listed on the Australian Securities Exchange (ASX) and renamed TPG Telecom Limited. The agreed merger ratio implies an enterprise value for VHA of AUD7.5 billion (USD5.5 billion), with MergeCo to have an estimated pro forma enterprise value of AUD15.0 billion, revenue of more than AUD6.0 billion and EBITDA of over AUD1.8 billion. Vodafone and HTAL’s shareholdings in MergeCo, and the remaining VHA net debt of approximately AUD4.8 billion that are not being contributed into the merged company, will primarily be held through an entity jointly owned by Vodafone Group and HTAL; debt held through this entity will be serviced by dividends from MergeCo and will not be consolidated by Vodafone Group or HTAL. Meanwhile, Vodafone Group, HTAL and TPG executive chairman David Teoh have entered into a 24-month standstill arrangement in relation to their shareholdings in the combined business.

According to Vodafone Group, the merger is expected to generate substantial cost synergies from the combination of two complementary networks, rationalisation of duplicated costs and economies of scale. Additionally, the enlarged entity will benefit from revenue synergies through cross-selling of products across VHA and TPG’s corporate and consumer customer bases. It is anticipated that the transaction will complete in 2019, subject to approval from TPG shareholders and regulatory authorities.

In parallel to the merger agreement, TPG and VHA have signed a separate Joint Venture Agreement (JVA) with a view to acquiring 5G-suitable spectrum in the 3.6GHz band (3575MHz–3700MHz) in the state’s upcoming auction. With the frequency sale scheduled to get underway in November 2018, it has been confirmed that the JVA will register as a participant – in preference to VHA and TPG participating separately. Further, it is understood that the two operators will negotiate with the aim of expanding the business of the joint venture in future, including to acquire future spectrum licences and/or facilitate various forms of efficient spectrum and network sharing, including a shared 5G Radio Access Network (RAN). The JVA is ongoing and will not terminate should the VHA-TPG merger fail to proceed.