There are winners and losers from every deal, and the merger of the Vodafone and Hutchison Telecommunications mobile businesses in Australia is no exception.
The initial impression is that the losers in this deal outnumber the winners.
Executives from both companies were sticking to the line that this was a “win-win” transaction with no change to the leading product offerings.
Their central proposition is that the new joint venture, called VHA, will have the scale to become a more formidable competitor to Telstra and Optus. The companies claim they will be able to offer leading products and services to business and consumers because of $2 billion in operational and capital expenditure synergies.
This was the argument put to Graeme Samuel at the Australian Competition and Consumer Commission when executives from Vodafone and Hutchison rang him this morning.
But if Samuel and his team investigate other markets where three players have carved up the mobile market, they will find what the analysts call “rational pricing”.
After this deal, VHA will have 27% of the market, Optus about 33% and Telstra 40%.
Australia is one of the few countries in the world with four mobile providers. It has not featured rational market pricing and that has benefited consumers.
Hutchison, which owns the 3 network, has been a particularly aggressive competitor. It has built market share by undercutting Vodafone, Telstra and Optus.
But that has come at a cost to Hutchison’s shareholders, including its controlling Hong Kong parent Hutchison Whampoa. Since 2000, Hutchison has accumulated losses in Australia of $3 billion.
Analysts now expect a return to rational pricing in the mobile market as the three mobile companies revert to the sort of behaviour typical of an oligopoly.
One reason analysts expect pricing to change in an upward direction is that they don’t believe the $2 billion figure for synergies released today.
There was little detail of the calculations behind the figure of $2 billion, but based on the most recent full year accounts provided by Hutchison and Vodafone, the cost reduction at the merged group will be an astonishing 50%.
VHA’s new CEO Nigel Dews, who ran Hutchison, is not known for his cost cutting skills and nor is the former Vodafone Australia CEO Russell Hewitt, who will join the VHA board as a non-executive director.
Vodafone had revenue last year of $2.4 billion and reported a net profit of $106 million. Hutchison had revenue last year of $1.3 billion and reported a loss of $285 million.
The other loser from the transaction is the concept of simplicity.
The most logical and straightforward transaction and the one that has been discussed in the industry and among the participants for several years, was the merger of Vodafone with Singapore Telecommunications subsidiary Optus.
It would have been a better deal for several reasons. Vodafone and Optus share network costs. Optus has a fixed line broadband network which is a source of growing demand. As well, it would not have required the myriad complexities associated with a joint venture.
Vodafone and Hutchison are gaining strong growth from their mobile broadband offerings. But they must rely on third parties for the fixed line backhaul to make it work.
Broadband is an important growth area for Vodafone and Hutchison because the penetration of mobile phones in Australia is now at 100%.
Dews will have his hands full dealing with the merger of the businesses, large scale redundancies, managing the rationalisation of 400 stores including Vodafone, Hutchison 3 and Crazy John’s, negotiating the future of the Hutchison roaming agreement with Telstra, potentially disentangling VHA from the Telstra relationship and limiting customer churn to competitors.
A merger of Vodafone’s business into Optus would have created the sort of integrated telecommunications provider that is being touted as the way of the future by everyone from Sol Trujillo at Telstra to Vodafone’s new CEO Vittorio Colao.
However, Colao will be pleased with the $500 million financial benefit from the merger. One of his five key strategic objectives is to more actively manage the Vodafone portfolio and, wherever possible, support in-market consolidation.
Industry sources say Vodafone’s sharing of the Optus network was not entirely harmonious. It taught Vodafone executives a number of lessons and probably influenced the outcome of the latest deliberations. As well, it is said that Optus would have demanded merger conditions that were far more onerous than those offered by Hutchison.
One of the winners from the transaction is the shareholder base at Hutchison Telecommunications. Their shares rose about 40% on Friday, a day before the deal was announced.
However, the listed Hutchison will continue to have the same problem that has plagued the stock for years – lack of liquidity.
Analysts stopped covering it because only about 10% of the shares are available as free float. That lack of liquidity helps to partly explain the sudden spike in the share price.
But it would not be surprising if the ASX refers Friday’s share price movement to ASIC.
Perhaps ASIC can add to that investigation the long standing Hutchison tradition of holding selective market briefings for analysts. That tradition was continued today, which is a slight on Vodafone’s attempts at transparency.
The merger of Vodafone and Hutchison will create a strong mobile competitor that is better able to fund continued investment in its network and new mobile broadband technologies.
But Samuel at the ACCC would be well advised to keep a close eye on what the deal will mean for business and consumers.
This article first appeared on Business Spectator
James was the editor and publisher of SmartCompany and LeadingCompany for five years. He is now the Australian Financial Review‘s companies & markets editor, and a former BRW editor.
