A cyclist rides passed a Vodafone Group Plc logo at the company’s exhibition space during the CeBIT 2018 tech fair in Hanover, Germany. (Photographer: Kriztian Bocsi/Bloomberg)

TPG, Vodafone Hutchison to Combine for A$10.9 Billion Company

(Bloomberg) -- There’ll be no quick escape from Australia for Vodafone Group Plc.

Vodafone Hutchison Australia Pty, Vodafone’s unprofitable mobile-phone venture with CK Hutchison Holdings Ltd., said Thursday it would merge with local broadband provider TPG Telecom Ltd. to better challenge market leader Telstra Corp.

The transaction locks in U.K.-based Vodafone and Hong Kong’s CK Hutchison for two years. Some A$4.8 billion ($3.5 billion) of the net debt amassed by their phone venture is being ring-fenced from the deal and will be guaranteed by the two offshore giants.

The deal spells the end of the standalone union between Vodafone and CK Hutchison that won only 19 percent of Australia’s mobile-phone market in almost a decade. Instead of quitting Australia, where Vodafone has battled to overcome a reputation for a patchy network, the agreement prolongs its commitment to the country.

“You just have to look at the amount of capital that Vodafone has placed in this infrastructure over the years and that’s something that usually links investors to the asset for a long time,” Inaki Berroeta, Vodafone Hutchison Australia’s chief executive officer, told reporters on a conference call. Vodafone and CK Hutchison are in “for the long run,” said Berroeta, who will lead the merged group.

Ownership Split

Vodafone Hutchison will have a 50.1 percent stake in the new group and shareholders of TPG, which is unrelated to the eponymous private-equity firm, will own the rest. The new entity will be worth as much as A$10.9 billion, the companies said. TPG Telecom CEO David Teoh will be chairman.

Shares in TPG, which had announced plans to build its own wireless network, soared in Sydney on a union with an existing network with 6 million customers.

TPG jumped 18 percent to A$9.31 in Sydney, valuing it at A$8.6 billion. Thinly traded Hutchison Telecommunications Australia Ltd., home to CK Hutchison’s stake in the mobile phone company, leapt 44 percent. Telstra rose 2.9 percent as investors viewed the deal as more favorable to Australia’s former phone monopoly than TPG’s plan to build its own network, which might kick off a price war. Vodafone fell 1.9 percent to 169.72 pence at 10:53 a.m. in London.

For more details on the deal, click here.

The consolidation, unanimously recommended by TPG’s board, comes amid intensifying competition in Australia’s telecommunications industry. The combined group, to be listed on the local stock exchange and called TPG Telecom Ltd., will have annual revenue of more than A$6 billion.

According to the terms of the agreement, Teoh has also locked in 80 percent of his 17 percent stake in the new group for 24 months after the deal’s completion.

Despite speculation in recent years that Vodafone would look to exit Australia completely, as CEO Vittorio Colao shifts the carrier’s focus to Europe, the high levels of debt accumulated from years of weak performance constrained its options. Nick Read, who takes over as CEO from Colao in October, inherits the Australian tie-up. Vodafone’s stake in VHA prior to the deal was essentially worthless and merging with TPG is a better move than a sale, said James Ratzer, an analyst at New Street Research.

“There’s no real upside in selling a worthless business today if you’ve got the opportunity to create some value,” Ratzer said. “There are synergies to be had.”

Vodafone Hutchison is Australia’s third-largest mobile operator. Amid intensifying competition and the rising cost of handsets, its loss widened to A$92.3 million in the six months ended June 30 from A$81.5 million a year earlier, according to filings.

TPG is being advised by Macquarie Capital and Herbert Smith Freehills, while Vodafone Hutchison is being advised by Bank of America Merrill Lynch, Deutsche Bank AG and Norton Rose Fulbright.

©2018 Bloomberg L.P.