Vodafone Hutchison Australia (VHA) and TPG Telecom have agreed the terms of a merger to establish a new integrated operator in Australia worth an estimated AUD 15 billion. Vodafone said the merged company "will be a more powerful challenger to Telstra and Optus", with an integrated fixed and mobile offering. It will also be better able to invest in next-generation mobile and fixed networks and provide service and product upgrades for Australian customers.
Vodafone and Hutchison Telecommunications Australia (HTAL) will each own an economic interest of 25.05 percent in the merged company, with TPG shareholders owning the remaining 49.9 percent. The board of the merged entity will include David Teoh as chairman (currently CEO and Chairman of TPG), Inaki Berroeta as managing director and CEO (current CEO of VHA), existing TPG directors Robert Millner and Shane Teoh, two nominees of Vodafone, two nominees of HTAL, and two new independent directors. The company will be listed on the Australian Securities Exchange and called TPG Telecom. There are no changes currently planned to any of the existing brands of either VHA or TPG.
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 combined entity will benefit from revenue synergies through cross-selling of products across both VHA and TPG’s corporate and consumer customer bases.
The new company will have a pro forma enterprise value of approximately AUD 15.0 billion, with an equal value assigned to VHA and TPG of AUD 7.5 billion. The combined group will have revenues of over AUD 6.0 billion, EBITDA of over AUD 1.8 billion and OpFCF of AUD 0.9 billion. Each company will contribute around AUD 2 billion of existing debt, giving the new operator total debt of around AUD 4 billion when it starts, including planned spectrum payments in early 2019.
The cash generation of the combined entity is expected to support the company’s dividend plan. It is intended that the company will pay a dividend of at least 50 percent of net profit after tax adjusted for one-off restructuring costs and certain non-cash items.
Vodafone, HTAL and David Teoh have entered into a 24-month standstill arrangement in relation to their shareholdings in the combined business, meaning the shareholder make-up will not change for two years. It is anticipated that the merger will be completed in 2019, subject to approval from TPG shareholders and regulatory authorities.
New joint ventures
Vodafone and HTAL’s shareholdings in the new company, and the remaining VHA net debt of approximately AUD 4.8 billion that will not be contributed into the merged company, will primarily be held through an entity jointly owned by the Vodafone Group and HTAL. Debt held through this entity will be serviced by dividends from the new company, and will not be consolidated by Vodafone or HTAL. Vodafone will provide a guarantee on AUD 2.4 billion of this debt, lower than the AUD 3.3 billion guarantee that Vodafone currently provides for VHA’s debt.
In parallel to the merger agreement, TPG and VHA have signed a separate joint venture agreement in order to participate together in the upcoming spectrum auction and manage their spectrum licences. The government is auctioning 125 MHz of 3.6 GHz band spectrum, with the auction expected to commence in late November. The joint venture will register as a participant in the auction. In addition, the parties will negotiate with the aim of expanding the business of the joint venture in future, including to acquire future spectrum licenses and/or facilitate various forms of efficient spectrum and network sharing including a shared 5G radio access network. The joint venture agreement is ongoing, and will not terminate if the merger fails to proceed.
TPG said it would pay a special dividend to shareholders prior to completing the merger, assuming its debt remains within targets. The merger of the Australian business still leaves the company with its mobile operator in Singapore. The company plans to spin off the Singapore business prior to the merger as pro rata shares for existing shareholders. TPG said the Singapore mobile service is on track to launch in Q4 and complete national outdoor coverage by year-end.
TPG also reported preliminary results for its full-year to July, saying these should be ahead of expectations. Revenue is expected at AUD 2.49 billion, little changed year-on-year, and EBITDA should total AUD 840 million, better than the improved guidance from H1.
