TheChek News Flow

Deal structure and the division of control will be key questions in the merger discussions between Australian telecom companies TPG Telecom [ASX:TPM] and Vodafone Hutchison Australia (VHA), while competition issues aren’t currently viewed to be an obstacle, according to a source familiar with the matter and a minority shareholder in TPG.

TPG, an AUD 7.2bn (USD 5.3bn) market cap company, announced yesterday (22 August) that it has engaged in “exploratory discussions” with VHA regarding a potential “merger of equals” of the two companies.

The final deal structure will depend on the intent of various shareholders involved, according to the first source. VHA is a 50:50 joint venture between Vodafone Group [LON:VOD] and Hutchison Telecommunications (Australia) Ltd. (HTA) [ASX:HTA], which is in turn majority-owned by Hong Kong conglomerate CK Hutchison Holdings Ltd [HKG:0001].

One potential structure could be to combine the underlying businesses of VHA and TPG, with VHA holding an interest in the combined entity, the source said. Alternatively, the deal could combine the listed Hutchison vehicle (HTA) with TPG and have Vodafone as a shareholder in that new entity, the source suggested.

TPG’s reference to a “merger of equals” would point to a scenario along those lines, although this news service notes that HTA in its short statement confirming the exploratory talks between VHA and TPG referred only to a “potential merger”.

Another possibility is that Vodafone might exit as part of the merger process and that TPG steps in as a joint venture partner in VHA alongside HTA, the source continued. In such a scenario, the VHA business could still be combined into the listed TPG entity, the source said.

An industry source said he had been informed, before yesterday’s announcements, that Vodafone Group has indicated to both VHA and TPG that it intends to exit Australia. If so, it could mean that TPG would take over Vodafone’s 50% stake in VHA, the same source said.

Vodafone declined to comment, but according to a person familiar the UK-based telecom operator remains committed to Australia and any post-merger entity will include Vodafone as a stakeholder.

The minority TPG shareholder said he would potentially be worried about being diluted, but would need to see the deal details the management is to propose before drawing any firm conclusions.

The shareholder added that TPG would want to run the merged entity since it is seen viewed as a “better operator” than VHA.

Echoing the shareholder’s view, the industry source said that TPG’s founder David Teoh would want to control the combined business given his record of acquisitions.

In addition to having founded TPG in 1992 together with his wife, Teoh is also the largest shareholder with a 34.4% stake.

HTA’s primary objective in Australia would be to create a viable business going forward, said the first source. Being backed by CK Hutchison, the conglomerate founded by Hong Kong tycoon Li Ka-shing, HTA has plenty of funding capacity to put more in more money, if it believes there will be good returns, the source noted.

The industry source agreed about the funding capacity, but also pointed out that HTA has so far not been active in managing and operating VHA.

Irrespective of the structure, the potential merger makes strategic sense for TPG, which has a solid core fibre network but is just starting to push into the mobile market, according to both the TPG minority shareholder and the industry source.

Since VHA is the third largest in Australia’s mobile market after Telstra Corp [ASX:TLS] and Optus, the potential combination of VHA and TPG is not likely to pose competition issues, according to the first source and the shareholder.

“The No. 1 and No. 2 are so much bigger and stronger. This (merger) potentially makes the combined business more viable,” said the first source. “It’s potentially pro-competition if you can make that happen.”

A spokesperson for ACCC, Australia’s competition regulator, said the regulator is aware of the reports of discussions between the parties and will conduct a public review if any transaction progresses.

HTA’s share of VHA’s total revenues was AUD 884.4m for the half-year ended 30 June, while its share of VHA’s net loss was AUD 14.9m, according to HTA’s latest half-year results.

TPG is advised by Macquarie and Herbert Smith Freehills, according to local media. It is also reported that Bank of America Merrill Lynch (BAML), Deutsche Bank, UBS and Norton Rose Fulbright are advising VHA.

TPG shares have jumped 23.2% in the two days since the announcement to AUD 7.75, while shares in thinly-traded HTA have rallied 133.3% over the same period to AUD 0.14. Vodafone Group shares fell in London trading yesterday by 0.2% to 175.7 pence.

TPG, VHA and HTA would not comment beyond the public statements.