Aborted mobile rollout leaves A$237m dent in TPG financials

TPG Telecom’s (ASX:TPM) aborted mobile network rollout plans have hit the telecommunications provider’s finances for the year to the tune of A$236.8 million.

The publicly-listed telco halted its mobile network rollout in January after the Australian Government banned the use of equipment made by Chinese telecommunications manufacturer Huawei – slated to be a key equipment supplier for the network – in Australian 5G networks.

In its preliminary financial report for the year ending July 2019, published on 5 September, TPG told shareholders that its decision to halt the rollout of its mobile network result in an impairment expense of $A236.8 million.

The scrapped rollout also led to an increase in amortisaton and interest expense related to mobile spectrum licences it bought to enable its mobile play, the company said.

The company’s results were also impacted by A$9 million in one-off transaction costs associated with its planned merger with Vodafone Hutchison Australia, which has been put on ice by the Australian competition watchdog.

On 30 August last year, TPG and Vodafone Hutchison Australia entered into an agreement to merge their two businesses and establish a combined entity that would boast both TPG’s fixed line infrastructure and Vodafone Australia’s mobile network.

However, the move was opposed by the Australian Competition and Consumer Commission (ACCC). TPG and Vodafone Australia subsequently launched legal proceedings in the Federal Court in a bid to have the decision reversed.

The case is set to be heard in the Federal Court from 10 September and wrap up within three weeks of that date. If the Court sides with TPG and Vodafone Australia, and the merger does eventually go ahead, the merged group will be listed on the Australian Securities Exchange (ASX) and renamed TPG Telecom Limited.

These factors, among others, contributed to a 56 percent tumble in TPG’s profit for the year, to A$175 million. The company’s preliminary reported earnings before interest, tax, depreciation and amortisation (EBITDA), meanwhile, came to $572.6 million, well short of the $A826.7 million it notched up the prior year.

However, TPG saw only a relatively minor 0.7 percent drop in revenue during the period, to nearly A$2.5 billion, although the company said that EBITDA continued to be adversely impacted by the loss of margin as DSL and home phone customers migrate to low margin National Broadband Network (NBN) services.

The effects of the NBN rollout are set to be felt for at least another year, with TPG telling shareholders that its 2020 financial year is expected to be the year that suffers the greatest impact from customer migration to the NBN. Indeed, the combined impact from residential DSL and home phone customers migrating to the NBN is expected to be around $85 million for the group.

TPG said that the annualisation of the deterioration of profitability of existing NBN customers experienced in the second half of the company’s 2019 financial year as a result of increased NBN wholesale cost per user is forecast to create a further NBN headwind for FY20 of approximately A$25 million.

It is anticipated that, by the end of FY20, TPG will have less than 15 percent of its residential broadband customer base remaining on ADSL, as more customers migrate to the NBN.

“Operating cost efficiency programs across the Group are expected to continue to deliver savings and another of growth is forecast for the Group’s Corporate Division but, in this peak year of NBN headwinds, organic growth for FY20 is not expected to be sufficient to offset the headwinds,” the company told shareholders.

Verizon strikes NBN Enterprise Ethernet reseller deal

The local arm of US telco giant Verizon has signed a reseller deal with NBN Co to supply the National Broadband Network (NBN) builder’s Enterprise Ethernet offering to its local customer base. 

The move gives Verizon Australia’s local customers, the bulk of which are government entities and private sector enterprises, the ability to combine NBN Co’s business-oriented broadband product with Verizon’s own services, such as Software Defined Networking (SDN) and Virtual Network Services (VNS).

“This agreement provides choice and competition that hasn’t existed on this scale before. Businesses, particularly those outside of the major cities, deserve access to the globally recognised, best in class services and capabilities that Verizon offers,” Robert Le Busque, Verizon’s regional managing director in Australia, said. 

“A robust network is the backbone of any business, and particularly today, where digital business is the norm, and organisations are increasingly looking for scalable, flexible network capacity to support global growth. 

“Verizon is pleased to be able to present a compelling alternative to Australian enterprise and government businesses,” he added. 

For Verizon, the deal marks a new milestone in its 20-plus year history in Australia, which has seen the company named among the panellists on the australian Federal Government’s Whole-of-Government Telecommunications Services Panel. 

The move sees Verizon join a handful of existing NBN resellers, including Telstra, Vocus and TPG, already offering the Enterprise Ethernet product, which is aimed squarely at the high-margin business market. 

NBN Co launched the wholesale enterprise product, which offers symmetrical speeds of up to 1Gbps and premium customer service, in October last year. At the time, the network builder said that its Enterprise Ethernet connections are designed to be built on request and feature a point-to-point fibre connection.

“This wholesale product has been developed with the specific needs of global enterprise and government organisations in mind. It is capable of delivering the service required by businesses that use data-intensive applications such enterprise network systems and cloud-based solutions,” NBN Co chief customer officer for business Paul Tyler said at the time. 

At launch, the product was touted as being packaged with a premium service-level agreement between NBN Co and retail service providers (RSPs) to provide faster resolution of faults as well as to encourage RSPs to offer an increased service experience for mission-critical applications. 

ACCC fixes software glitch behind early TPG-VHA merger rejection announcement

Australia’s competition watchdog has patched its website content management system (CMS) and apologised, after publishing its decision on TPG’s proposed merger with Vodafone Hutchison Australia (VHA) before it was meant to be made public.

In a somewhat unprecedented move, the Australian Competition and Consumer Commission (ACCC) released a statement on 16 May explaining how it accidentally published its rejection of the proposed TPG-VHA Australia merger a day before it was expected to reveal its decision.

“We apologise unreservedly for this unfortunate and serious incident,” ACCC chief operating officer Rayne de Gruchy said.

“We have thoroughly reviewed all of the processes and information technology systems that led to this error, and we want to assure our stakeholders this incident will not be repeated,” she said.

The publication of the decision to reject the merger sent the share price of both TPG and VHA’s 50 percent stakeholder Hutchison Telecommunications tumbling.

The ACCC said it had conducted a full investigation into the incident and claims that a fault in its website CMS, which has now been rectified thanks to a software patch, was to blame.

According to the regulator, when the information relating to the merger was being put into the back end of the mergers register, a third-party user was trying to access the existing webpage at the same moment as it was being updated.

“Instead of the new information being treated as draft content requiring internal approval, the flaw meant the content was live for eight minutes,” the ACCC said in its statement.

The information went live just before 3PM, giving the ACCC the opportunity to quickly issue a statement confirming the merger decision to both the Australian Securities Exchange (ASX) before the end of the trading day.

The ACCC’s rejection of the merger, which could effectively put an end to TPG’s ongoing efforts to become a major player in the country’s mobile telco market, saw VHA and TPG move to launch legal action against the regulator over the decision.

VHA CEO Iñaki Berroeta said on 9 May that the company remains firmly committed to the merger.

“VHA respects the ACCC process, but we believe the merger with TPG will bring very real benefits to consumers.  We have therefore decided that VHA should, together with TPG, pursue approval of the merger through the Federal Court,” said Berroeta.

The merger agreement between VHA and TPG has been extended to 31 August 2020 to allow the legal proceedings to run their course before the proposed deal lapses.

TPG-VHA can compete more effectively with Telstra and Optus: GlobalData

Following the news on 30 August 2018 that TPG Telecom and Vodafone Hutchison Australia (VHA) have agreed on a $15bn merger to create Australia’s third full-service telecommunications giant, Siow Meng Soh, Technology Analyst at GlobalData, a leading data and analytics company, offers his view on opportunities and challenges to the involved parties:

“This merger is a win-win for both companies. The merged entity, in which TPG shareholders own 49.9% and VHA shareholders the remaining 50.1%, will be in a position to compete more effectively with Telstra and Optus. As standalone companies, VHA and TPG will be competing against each other for the cost-sensitive segment of the market.”

“As a single provider, they will have greater economies of scale and bargaining power with suppliers. TPG will get instant access to a nationwide mobile network to offer customers competitive fixed-mobile bundled services. VHA gets access to enterprise accounts, exposure to more SMBs and a solid fixed network infrastructure (better margin than buying wholesale NBN services).”

“With the 5G spectrum auction around the corner, TPG will need to inject more cash to obtain 3.6GHz spectrum while it does not yet have paying customers on its mobile network. Moreover, joining forces with VHA gives TPG greater bargaining power with a smaller number of 5G equipment suppliers; after the ban on Huawei and ZTE to supply 5G by the Australian Federal Government. From VHA’s perspective, it needs to start planning and implementing 5G to avoid lagging too far behind Telstra and Optus. The tie-up will benefit the two in terms of cost avoidance in network investment and speed up 5G rollout. VHA’s 5,000 mobile sites and TPG’s fixed assets (27,000 km+) for backhaul will enable the merged entity to accelerate 5G implementation.”

“However, there are several challenges for the merged entity. TPG’s current management emphasizes on keeping the organization lean and compete on price while Vodafone is more about delivering solutions with greater business value on top of connectivity. VHA focuses on customer service and has 350 consultants to support business customers across its retail stores, and an account manager for businesses with 10 or more connections. TPG on the other hand, treats business customers the same as consumers and relies mostly on online channel, telephone sales and dealers.”

“After the merger, Vodafone Group’s ownership will be lowered to 25.05% which throws into question the amount of influence the new entity and how much support it will offer going forward.”

“In particular the Internet of Things (IoT) business requires strong support from Vodafone and TPG’s enterprise sales team are not equipped to sell IoT solutions. The new entity will receive the have majority of its revenue from consumer and SMB, with the enterprise segment contributing less than 15%. In the short-term, the merger could see the new entity focusing more on consumer and SMB, less on enterprise and government.”

“Lastly, the merger is subject to regulatory approval as a standard procedure but this deal will attract greater scrutiny from the ACCC due to the impact on competition. Meanwhile, the announcement has brought some relief to the market since the merged company is unlikely to pursue an aggressive pricing strategy that will bring down ARPU. With the merger, TPG no longer needs to undercut competitors to gain market share and build scale.”

TPG/Voda merger set to kill $9.99 mobile plans, 4th mobile network: IbisWorld

Vodafone Hutchison and TPG, Australia’s third and fourth largest telecommunications companies, have announced a $15 billion merger to create a third giant in the telco services industry.

IBISWorld analysts are predicting the merger will likely put a stop to hints of providing $9.99 unlimited mobile plans for new customers. According to IBISWorld, the merger is expected to combine the resources of both companies to more effectively take on Telstra and Optus.

Both TPG and Vodafone bring different strengths to the merger, IBISWorld added. “Vodafone is currently the third-largest mobile network operator, with approximately 6 million customers, while TPG holds the second-largest fixed line network in Australia. The combined entity is expected to continue investing in both fixed line and mobile networks, with the aim of delivering faster services and more competitive offerings to more customers,” said IBISWorld Senior Industry Analyst Tommy Wu.

“Prior to the merger, Australians have had the choice of three providers in both mobile and broadband markets, with Telstra and Optus being the major providers and TPG and Vodafone rounding out the big three in the respective fixed line and mobile markets. As a result, the operating and competitive landscape of these markets are not projected to change significantly with the merger,” said Wu.

According to IBISWorld, TPG has already made significant investment in acquiring spectrum with the aim of building a fourth mobile network. However, the feasibility of a fourth mobile network in a small domestic market was unclear.

“The merger will likely help alleviate this concern as TPG combines their fibre network and capacity with Vodafone’s mobile network to capitalise on opportunities presented by 5G services,” said Wu. It remains to be seen whether the Vodafone and TPG brands will combine or remain separate.

“In order to avoid competition between the two brands, TPG’s aggressive discounting to push for new customers in the mobile market is likely to end, particularly $9.99 unlimited mobile plans,” said Wu.

Meanwhile, the Australian Communications Consumer Action Network said it was in favour of increasing competition and improving affordability of telco services for everyday Australians.

“We are concerned that the recently announced merger of TPG and Vodafone will reduce customer choice within the market, with fewer options available for mobile and fixed services providers, as well as an eventual consolidation of products on offer,” said ACCAN CEO Teresa Corbin. “However, we acknowledge that the new entity of TPG Limited may have greater market power to place pressure on Telstra and Optus to lower their prices, increasing affordability for consumers.”

“We hope that the merger will result in greater investment in infrastructure, such as 5G technology, and ultimately increase the availability of reliable, accessible and affordable telco services across Australia,” she added.

IBISWorld predicted that Telstra and Optus would likely welcome the merger, as it removes the threat of a fourth player crowding out the mobile market.

Vodafone Australia, for its part, assured customers it would be business as usual following the announcement of the proposed merger with TPG.

“We’re very excited about the future, but for the moment, nothing changes for our customers,” said VHA Chief Commercial Officer Ben McIntosh. “They can continue to enjoy all the things they love about us including A$5 Roaming, no lock-in handset contracts, 35-day prepaid expiry, and NBN Instant Connect and 4G Backup.”

“Customers can continue to use our services, upgrade or change plans, or join us as a new customer with confidence,” he added. “If the merger is approved, it will create even more opportunities for us as a combined entity to drive value for Australian consumers.”