Merged Vodafone and 3 become one in Australia

Merged Vodafone and 3 become one in Australia

by Dan Oakes

The volatile Australian telecommunications industry has been shaken again with news that the third and fourth-largest mobile operators are to merge. Vodafone Australia and Hutchison Telecommunications (Australia) will each own 50 per cent of the joint venture, which will be called VHA Pty Ltd. Services will be marketed under the existing Vodafone brand, but the new entity will retain the rights to Hutchison's 3 brand. The announcement came after the ASX demanded answers from Hutchison on Friday about why its shares rocketed 30 per cent on what, for the company, was very high turnover.

VHA will hold an estimated 27 per cent of the mobile subscriber market, which has now been pared down to three players, the other being Optus (about 33 per cent) and Telstra (40 per cent). The merger has been endorsed unanimously by Hutchison's board, but will need the go-ahead from Hutchison's shareholders, the Australian Competition and Consumer Commission and the Foreign Investment Review Board, the latter because Hutchison's parent company, Hutchison Whampoa, is based in Hong Kong.

Members of VHA's proposed board said yesterday the merger should be completed by the middle of the year. Vodafone will receive a deferred payment of $500 million from VHA to equalise the value difference between the merging companies. Hutchison will remain listed on the stock exchange, but its chief executive, Nigel Dews, will become CEO of the new entity. Vodafone Asia-Pacific and Middle East region chief executive Nick Read will fill the chairman's role. Russell Hewitt, chief executive of Vodafone Australia, will be a non-executive director of VHA.

"Bringing Vodafone Australia and 3 together will create a stronger mobile operator with approximately 6 million customers and combined total revenue of approximately $4 billion," Mr Hewitt said during a teleconference with journalists. Mr Dews said the board believed VHA could save $2 billion through economies of scale in procurement, product development, IT, networks, commercial operations and administrative expenses, but he refused to go into detail.

The new entity would control 400 retail outlets and employ 3700 people. But Mr Dews said redundancies would result from the merger and resulting "synergies", and that they would mainly be in back office areas rather than retail. Mr Dews also said all existing customer contracts would be honoured. Analysts said Hutchison and Vodafone would complement each other, with 3 being strong in postpaid and non-voice accounts, and Vodafone's strength lying in prepaid accounts. They also said Optus might suffer more than Telstra from the new competitor.

"Over the past three to five years, Optus Mobile has suffered at the combined hands of Vodafone and 3 (mobile revenue share falling every year since FY04)," said Goldman Sachs JBWere in a note to clients. "In other words, Optus has been the natural 'prey' of the No. 3 and No. 4 players over the past three to five years. It will be interesting to see whether VHA continues to aggressively attack Optus Mobile post this merger." Both major telcos have existing joint ventures with VHA's parent companies, Telstra with Hutchison and Optus with Vodafone.

An Optus source said yesterday the company was studying the detail of the VHA deal but said Optus welcomed "market consolidation where it is likely to result in a more efficient and competitive industry structure". In Perth, Telstra chief executive Sol Trujillo said: "It doesn't really affect Telstra. Because we are the market leader, we are setting the pace and we know what we're doing."