Billion-dollar deal sees TPG mobile customers move to Vodafone

Vodafone Australia and TPG have teamed up to announce two commercial agreements worth more than AU$1 billion that will see the number three mobile operator in Australia rely on the number three fixed-line operator in the country for dark fibre infrastructure. In turn, TPG will be taking its mobile customers onto Vodafone's network.

Under the terms of the arrangements of the base AU$900 million dark fibre deal, TPG is set to construct an additional 4,000 kilometres of fibre to Vodafone's cell towers across the country, outlaying AU$300-400 million in capital expenditure.

"For customers, it will mean a higher-performing, 5G-ready network, which will enable exciting future opportunities such as virtual- and augmented-reality applications," Vodafone Australia CEO Inaki Berroeta said in a statement.

The 15-year deal, which has been a year and a half in the making, is set to be completed by mid-2018.

Benoit Hanssen, Vodafone Australia's chief technology officer said the deal would allow the mobile telco to "flatline" its transmission costs.

"The way the market currently works when it comes to transmission agreements that we lease from third parties, it's a volume based approach, so the more you transmit, the more you pay," he said.

"What we are able to do with dark fibre is TPG will then provide the physical glass, we will ourselves, light up that fibre with our own equipment -- that actually decouples the relationship of more data for more cost.

"Fibre, in terms of capability, is nearly unlimited."

At the same time, TPG is set to shift its 320,000 mobile wholesale customer base to Vodafone. Customers will be invited in batches to move over from Optus' network to Vodafone, with TPG chief operating officer Craig Levy stating that the telco will offer data incentives for customers to move, and current users will not need to purchase a new SIM card to shift networks.

"We are excited and moving into the future, what it gives TPG, it gives us the ability to keep up with the market," Levy said.

"If you look at us in the last two years, we haven't kept up with the pace as much as we'd have liked to."

"This gives us the opportunity ... to be more aggressive in the marketplace, and hopefully improve what has been, a little bit, of a declining mobile business."

The shift of mobile customers to Vodafone is only currently planned for TPG brand customers, and not those gained in the recent iiNet purchase.

Moving to Vodafone will allow TPG to lower its customer data reporting time from one day to half an hour. Neither telco would be drawn on the length of the mobile virtual network operator deal, nor when TPG would eventually end its arrangement with Optus.

"One of the biggest benefits for all existing TPG mobile customers is access to 4G on Vodafone's network, meaning they will be able to experience substantially faster data speeds," TPG CEO David Teoh said.

From today, new customers on TPG mobile offerings will be on the Vodafone network.

The deal follows news on Monday that fibre infrastructure company Vocus Communications is planning to merge with telecommunications carrier M2 Group to form the fourth-largest telecommunications provider in Australia, and the third-largest in New Zealand.

The combined entity will be worth more than AU$3 billion, according to the companies, bringing it closer to its fixed-line competitors Telstra, TPG, and Optus.

"Today, we have announced plans to create a full-service, vertically integrated trans-Tasman telecommunications company," said David Spence, Chairman of Vocus, during a call with media on Monday morning.

"The combined group will benefit from extensive infrastructure in Australia and New Zealand with well-established brands and more than 2.1 million services. Vocus and M2 together make a compelling proposition, and combined will create scale and reach to continue our growth strategies. The combined group will be well placed to leverage growth, and data consumption, and IT outsourcing. We will deliver an exceptional experience on the NBN, and on the UFB in New Zealand."

The entity would provide retail internet, corporate and wholesale internet and VoIP, datacentre and cloud services, domestic and international bandwidth, dark fibre, and retail electricity and gas.

The companies' scrip-based merger -- wherein M2 shareholders will be given 1.625 Vocus shares per M2 share -- has the support of both boards, but has yet to attain a shareholder endorsement or approval from the Australian Competition and Consumer Commission (ACCC) and the Federal Court. These procedural hurdles are set to take place in early 2016.

Vocus CEO James Spencely pointed out that there have been 30 acquisitions between both companies, with Vocus attaining approval in June to acquire Amcom after the latter's shareholders voted in favour of the AU$1.2 billion takeover, despite TPG's efforts to block the deal.

The Vocus-M2 merger also came off the back of TPG acquiring rival telco iiNet earlier this year.

M2 had previously attempted to outbid TPG, in April launching a predominately scrip AU$2.25 billion counter-bid and eclipsing TPG's initial all-cash offer of AU$1.4 billion in March. M2's offer had been backed by iiNet, and would have seen 0.803 M2 shares swapped for each iiNet share, plus a AU$0.75 special dividend.

However, TPG then upped its offer to a deal worth around AU$1.5 billion wherein TPG would pay AU$9.55 per iiNet share, incorporating a AU$8.80 cash or scrip consideration and AU$0.75 cash per share.

iiNet shareholders ultimately voted in favour of the acquisition, with the ACCC and the Federal Court also approving the deal last month.

The recent Vocus-M2 merger had sparked fresh debate about Vodafone's future; with Vodafone the last remaining significant telco provider that had yet to be acquired by a fixed-line provider, David Kennedy, research director of Telecoms at Ovum, predicted on Tuesday that either TPG or Vocus would attempt to snap it up.

"It is highly likely that Vodafone will be integrated into a fixed telco at some point," said Kennedy.

"TPG and M2 are the two obvious bidders. The merger with Vocus gives M2 extra financial clout and network assets. We can therefore expect that the bidding war for Vodafone, when it comes, will be a more balanced and unpredictable battle."