No deal for Vocus NZ sale highlights market mismatch

Vocus’ decision to retain its New Zealand business after failing to receive an ‘appropriate’ offer, highlights uncertainty over customer loyalty in the age of UFB, according to one industry expert.

Last week Vocus announced that while it had received ‘multiple’ offers for the New Zealand business – which includes Slingshot, Orcon, Flip, 2Talk and Switch Utilities – none of the offers ‘appropriately reflected the fundamental and strategic value of Vocus NZ nor provided sufficient certainty of funding and execution’.

Bob Mansfield, Vocus chairman, said the Kiwi operations were an ‘excellent business’ with an attractive growth profile, clear competitive position and track record of delivering solid returns on capital, and Vocus will continue to invest and grow the Kiwi operations.

Shane Minogue, IDC New Zealand senior research manager, told Telecom Times that despite a wide field of potential buyers ‘when it came down to it, no one was in the position to make the sizeable acquisition at the price desired’.

“Given the current market dynamics and competitive pressure, making an acquisition of this size would be a big risk,” Minogue said.

“Vocus has a number of great assets from a network point of view and a large customer base,” Minogue said. “Scale is an attractive proposition in the telco market where margins are so thin at present, but the current competitive pressure meant that bidders were not willing to pay a premium for the business given the downward pressure in the market.”

Earlier this year Minogue flagged the increasing cost of broadband customer acquisition for telcos, with many offering free TVs, gaming consoles, and even fridges, in an effort to get new customers to sign up.

“While it’s fantastic for the consumer, it raises questions over how sustainable this level of competition is for the retail broadband market,” Minogue said.

He said that likely also played a part in the Vocus situation. Vocus’ Slingshot and Orcon brands are both key players in the New Zealand ISP market and among the companies rushing to secure broadband customers.

“When you look at the amount being spent to acquire customers there is a mismatch taking place. Players are investing huge sums of money to acquire customers and barely making that return during the length of a contract,” Minogue said.

“This suggests players are seeking to acquire customers in the hopes that the current level of competition will subside in 12-24 months.”

However, he said nothing in the market at present indicates that this will happen.

“While some assume that the UFB rollout is causing increased churn, they expect it to subside once the UFB rollout is finished. However, UFB makes it so easy to switch provider that if offers remain this good, consumers will continue to churn to get the free TV, gaming console or fridge.

“This is placing a high price on customers at present and likely resulted in varied valuations of Vocus’ customer base.”

Minogue said while the Vocus customer base is ‘a huge asset’ given how costly it is to acquire customers, the current market means it is difficult to place a high value on customers when they are so willing to churn and when future price pressure is likely to continue.

“Vocus’ large customer base would make sense for a number of medium-sized players, like Trustpower and 2degrees, however, none of these players made it over the line in the end, highlighting that while the deal looked great for each business in some aspects, overall it did not meet the right valuation for the providers,” Minogue said.

An acquisition by either Spark or Vodafone – the two largest players in the New Zealand market – would also have prompted close scrutiny from the Commerce Commission over market dominance, given their sizes, while issues around integrating Vocus’ business into a current business would also have been an influencing factor for some.

Minogue said the New Zealand telco market is expected to see consolidation.

“With around 90 providers competing at present, it simply is not sustainable.

“Certainly, when the UFB rollout is complete and providers take a look at the customer base they have acquired and how the business is running, consolidation will occur. The margins are so thin in the broadband space at present that you either need considerable scale or an adjacent offering to make money.

“With that in mind, we expect a large number of the smaller providers who lack differentiated offerings to fold in the medium term.”

He says while the Vocus decision itself won’t impact the market activity, it highlights the difficult market constraints in place and reinforces that view.

As to Vocus itslef, Minogue said: “Vocus is certainly going through a period of transition and it hasn’t been easy and this news is the latest in a number of significant developments,” Minogue said.

“The company has had leadership changes (at a group level), faced legal action, had an earnings downgrade, and so on. It is tough to say what will happen next for Vocus. If Vocus had sold the NZ business it would have likely used the proceeds to pay down the company’s existing debt. Without this, Vocus has said that it has an agreement in place with lenders to alter its debt repayments and extend the ‘surge limit’ and continues to pursue refinancing, aiming to complete by 30 June.

“The current financial situation may restrict Vocus strategically somewhat ,although the company has stated that refinancing will allow completion of its strategic initiatives and to compete strongly. Apart from that, we will have to wait and see.”

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