August 30, 2018 / 6:55 AM / 3 months ago

Breakingviews - Australia’s $11 bln telco deal dials up high hopes

A commuter uses her mobile phone as a Circular Quay to Cockatoo Island ferry passes under the Sydney Harbour Bridge, November 24, 2015. REUTERS/Jason Reed

SINGAPORE (Reuters Breakingviews) - A telecom deal Down Under is dialing up high hopes. TPG Telecom and a Vodafone Hutchison joint venture are uniting to create a A$15 billion ($11 billion) competitor in the cutthroat market. The merger reduces chances of a price war and investors are implying hefty synergies can be achieved. Even rival Telstra may come out ahead.

The union between David Teoh’s aggressive broadband provider TPG and Australia’s third-largest mobile carrier has been long in the making. TPG made a costly splurge into mobile, while getting squeezed on earnings by customers moving to Australia’s National Broadband Network. Vodafone Hutchison Australia, meanwhile, went through a painful turnaround that didn’t help it advance on larger rivals Telstra and Optus.

    For now, there could be multiple winners. Teoh keeps 49.9 percent of the enlarged operation with Vodafone and Li Ka-shing’s Hong Kong holding company owning a quarter each. Vodafone can use dividends thrown off by the merged outfit to pay down local debt. And despite a temporary lockup, the new arrangement should help provide it with an easier path to an exit someday.

At the same time, TPG should be a stronger competitor offering more services. There is also great optimism for cost savings and even potentially revenue uplift. TPG’s market value has increased by A$2.7 billion since talks were initially revealed earlier this month, including a 16 percent rise on Thursday. That effectively anticipates annual synergies of some A$350 million a year, or a chunky 6 percent of the combined revenue.

   In a rare turn of merger events, Telstra could benefit, too. Its shares jumped 10 percent when the deal possibility surfaced, before sliding back and then gaining 3 percent again following the announcement. The whole industry may become more profitable because of the merger. Markets with three or fewer competitors tend to have higher EBITDA returns, according to Bernstein research. And a race to the bottom, as occurred in India and pushed Vodafone to retreat, will be less likely.

     A more muscular rival, with about a 20 percent share of the mobile and fixed-line market, means not everyone can come out ahead, though. Number-two Optus may be the odd one out.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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