VOD Vodafone Group PLC

By Robb M. Stewart 

MELBOURNE, Australia--One of the biggest recent deals in Australia faces collapse after the country's antitrust regulator said it would block the combination of TPG Telecom Ltd. and Vodafone Hutchison Australia.

The companies had been seeking approval to create a company with an enterprise value of about 15 billion Australian dollars (US$10.5 billion), including debt, bringing together TPG's more than 1.9 million broadband subscribers and Vodafone's roughly 6 million mobile-service subscribers.

However, the Australian Competition and Consumer Commission said Wednesday it opposed the deal, which it said would reduce competition in the country's already very concentrated telecommunications markets.

In response, the two companies said they planned to launch legal action and would seek approval for the tie-up in the federal court. The pair have given their deal until the end of August next year to allow for the court case and the merger process.

The regulator's decision was inadvertently published online on its mergers register and quickly confirmed in a brief statement to the Australian Securities Exchange, sparking a sharp drop in TPG shares. The company, which now has a market value of about A$5.63 billion, ended the day down almost 14%.

The ACCC said the proposed merger would, in particular, substantially lessen competition in the supply of mobile services since it would preclude TPG from entering as a fourth mobile-network operator in Australia.

"TPG is the best prospect Australia has for a new mobile network operator to enter the market, and this is likely the last chance we have for stronger competition in the supply of mobile services," Rod Sims, chairman of the regulator, said.

Analysts had considered there was a greater chance of regulatory approval for the deal after TPG abandoned efforts in January to build a mobile network to challenge Vodafone and the country's two biggest operators, Telstra Corp. and Singapore Telecommunications Ltd.-owned Optus. TPG made that decision, having invested about A$100 million in early work, after Canberra blocked use of equipment made by China's Huawei Technologies Co. in the rollout of next-generation 5G mobile infrastructure on national security grounds.

Australia's telecommunications operators have struggled in recent years with intense competition in the mobile market and in fixed-line services as the federal government pushes ahead with a nationwide broadband network, which sells capacity to operators.

In rejecting the planned merger, Mr. Sims said the ACCC anticipated TPG would end up rolling out its mobile network if it didn't combine with Vodafone Hutchison, characterizing it as a "commercial imperative" for TPG to offer a mix of fixed and mobile services.

He said TPG has a record for disrupting the telecom sector and was expected to bring cheaper mobile plans and large data allowances with its own network, competing strongly with the incumbents. He added the company had already purchased mobile spectrum and had an extensive fiber transmission network, a large customer base and well-established brands.

The regulator said Vodafone has moved beyond mobile, entering the fixed-broadband sector, which was also likely to improve competition.

The ACCC said Telstra, Optus and Vodafone control about 87% of the mobile-services market. Similarly, in the fixed-broadband market Telstra, TPG and Optus collectively have a roughly 85% share.

Vodafone Hutchison Chief Executive Inaki Berroeta said the company remained committed to a merger with TPG and believed a combination would bring real benefits to consumers. He said Vodafone had a less than 1% share of the fixed-broadband sector, and there was little overlap with TPG.

TPG Chairman David Teoh said while the company respected the regulator's process, the decision had significant implications for Australian consumers and had to be challenged. A combination would create a new competitive force, and the biggest companies in the industry would only entrench their power if left unchallenged, he said.

Billed as a merger of equals, the combined company was to have been 50.1% owned by Vodafone Hutchison, a 50-50 venture between the U.K.'s Vodafone Group PLC and an Australian company controlled by Hong Kong-based CK Hutchison Holdings Ltd. The remaining interest would have been held by TPG's shareholders.

TPG and Vodafone Hutchison anticipated substantial cost savings and revenue benefits from cross-selling products, and an enlarged company with revenue, estimated when the merger was first announced last August, of about A$6 billion.

The deal was one of the biggest mergers and acquisitions unveiled in 2018, according to data compiled by Mergermarket, which estimated it was the third-biggest deal of the year, behind the spinoff of supermarket chain Coles Group Ltd. by Wesfarmers Ltd. and the sale of a majority interest in Sydney Motorway Corp. by the government of the state of New South Wales.

Write to Robb M. Stewart at robb.stewart@wsj.com

(END) Dow Jones Newswires

May 08, 2019 05:50 ET (09:50 GMT)

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