Vodafone Ltd. (VOD) and Hutchison Whampoa Ltd. (0013.HK) said
Monday they will merge their Australian mobile telecommunications
businesses in an equal joint venture.
Analysts said the move will give the market's number three and
number four players - both already fast-growing innovators - the
scale to claw more market share from the largest mobile operator,
Telstra Corp. (TLS), and market number two, Singapore
Telecommunications Ltd.'s (Z74.SG) Optus.
The move could also help insulate the pair from a rapidly
deteriorating domestic economy, with discretionary spending on
mobile calls tipped as an area consumers will cut back as the
slowdown bites.
The joint venture, between Vodafone's Australian unit Vodafone
Australia Ltd. and Hutchison 3G Australia Pty. Ltd., a unit of
Hutchison Telecommunications (Australia) Ltd. (HTA.AU), will be
renamed VHA Pty. Ltd.
"This transaction will benefit customers in Australia as it
creates a company with the necessary scale to compete strongly in
the mobile market," said Vittorio Colao, chief executive of
Vodafone.
The combined group will have a market share of between 25% and
27%, Hutchison Australia's current chief executive, Nigel Dews,
told reporters in a phone briefing.
Dews has been named chief executive of the joint venture while
Vodafone's current chief executive for Asia-Pacific and the Middle
East, Nick Read, will be chairman.
Paul Budde, an independent mobile analyst, described the planned
joint venture as a "great step forward."
Dews said joint venture negotiations gathered steam around
December, as the latest downleg of the global financial crisis
pushed Australia to the brink of a recession.
However, company executives Monday downplayed any link between
deteriorating market conditions and the planned tie-up. "I really
don't think the economic climate is relevant to this proposal.
Basically, we looked at the market, we looked at the strength of
Telstra, the strength of Optus, the required investments to offer
the full breadth of products and services, the comprehensive
network we want to offer, the distribution, it's all about scale,"
Read said.
Hutchison has a strong base of 3G and contract customers, while
Vodafone has more customers on its second-generation or 2G network
and prepaid customers. Hutchison Whampoa spokeswoman Laura Cheung
said the merger is aimed at strengthening the companies' positions
in a market faced with "keen competition".
Nevertheless, analysts said that in a rapidly deteriorating
economy, any scale gains are likely to prove invaluable in
insulating the business from the downturn - where margins will come
under pressure as consumers pare back mobile use and delay planned
handset upgrades.
"Mobile is a commodity product, you have to be able to fight on
low margins and you can only do that when you have scale," Budde
said.
Read said the increased scale would help trim overall unit costs
and "allow us to be more competitive in the market place." The
joint venture will create a mobile operator with around six million
customers - four million from Vodafone and two million from
Hutchison - and total combined revenues of around A$4 billion as of
the 12 months ended June 30, 2008. Telstra Corp., by comparison,
has 9 million customers, according to a Telstra spokesman, while
Budde estimates Optus has around 7.6 million.
In response to the news of the joint venture, Hutchison
Telecommunications (Australia) Ltd. shares rose as much as 3.0
Australian cents to 14.5 cents, before closing up 1 cent at 12.5
cents. Telstra Corp. ended up 2 cents at A$3.73, while the
S&P/ASX 200 index closed up 1.1%.
Telstra Chief Executive Sol Trujillo said Monday he doesn't
expect the transaction to impact Telstra.
"It doesn't really affect Telstra because we are the market
leader, we are setting the pace and we know what we're doing," he
said.
Still, Budde noted that Hutchison has been the best market
performer in terms of growth rates since 2004, although coming off
a very low subscriber base. Hutchison's subscriber base grew by 29%
in fiscal 2007-08, compared with 10.6% for Vodafone, 6.4% for
Optus, and 1.3% for incumbent Telstra, Budde estimates.
Monday's deal is subject to approval by Hutchison Australia
shareholders, the Australian Competition & Consumer Commission,
and the Foreign Investment Review Board.
Dews said the companies have spoken with ACCC Chairman Graeme
Samuel, who gave "no assurances" as to how the commission may rule
on the matter.
Analysts don't expect the deal to face any competition hurdles,
although Budde said the ACCC will likely signal it will be more
vigilant in the future for any signs of price collusion, given the
Australian mobile market will be reduced to just three players if
the joint venture goes ahead.
Under the deal, VHA will market its products and services under
the Vodafone brand, but will retain exclusive rights to use
Hutchison's "3" brand in Australia.
Ongoing investment will expand the combined group's third
generation, or 3G, network to reach around 95% of Australia's
population, Vodafone's Colao said.
In recognition of the value difference between the two
businesses, Vodafone will receive a deferred payment of A$500
million from VHA.
The venture is expected to generate synergies worth over A$2
billion, and will be positive for both earnings per share and
earnings before interest and tax, from the first full year post
completion of the deal.
It will be debt-free from the outset, with the exception of the
A$500 million loan note, with Hutchison Australia to retain its
debt on its own balance sheet, Hutchison Australia group finance
director Frank Sixt said.
"The combined scale of this new entity, with the global
strengths of Vodafone and Hutchison, will provide the necessary
elements for a third strong competitor able to compete and invest
long-term in the Australian market place," market research firm
Ovum said in a report.
"At a time when both the industry is changing and there are
questions over economic outlook, the global experience and
expertise of the two parents will be priceless."
Goldman Sachs advised Hutchison Whampoa and Hutchison
Telecommunications. UBS advised Vodafone.
-By Rachel Pannett, Dow Jones Newswires; 61-2-6208-0901;
rachel.pannett@dowjones.com (Jeffrey Ng in Hong Kong contributed to
this story.)
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