VHA and TPG close by stating ACCC needs a 'forensic Tardis' to oppose merger

Justice Middleton opened the final days of the case between the ACCC and VHA/TPG over the proposed merger by saying he was hoping for a judgement prior to end of 2019 but it's more likely that a decision will come in February 2020.
Written by Anthony Caruana, Contributor

Counsel for Vodafone Australia, Peter Brereton, QC, began his closing submission to the Federal Court on Vodafone and TPG's blocked merger by saying there needs to be a real chance and not just a possibility of TPG building a network for the block to go ahead. He added that the Australian Competition and Consumer Commission (ACCC) has "not operat[ed] in the real world" during these legal proceedings. 

Brereton asked Middleton to consider a world where TPG has built a fourth network, one where TPG doesn't build a network, and what the impact on competition would be under both situations. Brereton called the ACCC case an ostrich, and said the opposition to the merger has been speculative.

TPG's decision in 2017 to pursue construction of a network and its decision to abandon those plans in 2019 aren't the question Middleton needs to answer, said Brereton. The focus needs to be on what TPG would do if the merger is blocked. 

The Judge asked Brereton whether he needed to put himself in TPG's position or that of David Teoh, TPG's largest shareholder, founder, CEO, and chairman. Brereton responded by saying that Middleton needed to take into consideration that TPG is a public company and make a decision from that viewpoint. Brereton did concede however, that what Teoh wanted is what would happen.

Brereton argued that competition would be enhanced as a result of the proposed merger, with VHA becoming a stronger company. He added that the ACCC's view is that this is true, but that a fourth network created by TPG would increase competition even further. Section 50 of the Competition and Consumer Act 2010 talks about a reduction in competition, said Brereton, but the ACCC's argument wasn't about a reduction in competition, but a less substantial increase in competition.

The issue of something being "likely" and there being a "real chance" of the fourth network being developed was scrutinised by Brereton. Citing previous cases, he asked Justice Middleton to ensure his judgement was based on that "real chance". Middleton noted that he would carefully consider this in order to minimise the chance of an appeal. 

"Evidence is the key to all this," said Middleton.

The network TPG proposed to build would have become "one of the great white elephants of Australian telecommunications history," said Brereton. 

During the early days of the case, issues with the design of the TPG network, resulting in congestion and performance issues, were highlighted. This pointed to a flawed network that would have disenfranchised customers. Despite Teoh's forecast of 60,000 new customers each month, the evidence pointed to that being a flawed estimate. While there was evidence that the technical issues could be resolved, there was no commercially viable model presented by the ACCC.

"It's not up to the court to engineer competition," said Brereton during his closing.

When competitors to TPG's MVNO business were questioned, Brereton said their evidence understood the "warts" on TPG's proposed offerings and services. Brereton also questioned whether TPG's proposed network, which would have targeted the budget end of the market, would have created competition for Telstra, Optus, and Vodafone. 

This argument extended to the benefits and synergies that would come about from a merged entity. For example, VHA has allegedly always had plans to make use of 700MHz spectrum -- which TPG now has a decent slab of after paying over AU$1.2 billion for at auction. And there were also opportunities to better manage debt and engage in investment.

In his evidence, Teoh told the court that "it can't be done" in reference to building a new network that was technically and commercially viable -- evidence that Brereton said the ACCC never contradicted. In the absence of evidence to the contrary, Brereton said the ACCC should not expect the situation to change. Just because Teoh said "the future is mobile" in evidence doesn't mean building a new network is viable for TPG, VHA's legal counsel said, particularly in light of the rapid shift the market has undertaken towards 5G.

Following the lunch break, TPG's counsel, Dr Ruth Higgins SC, took over for the closing portion of the hearing, saying that the ACCC's case was theoretical and based on possibilities. Higgins said that three things were clear: TPG would not build a new network and Teoh would not change his mind on this, there's no business case for such a venture, and the merger would create competitive benefits and not stifle competition.

Higgins said the ACCC did not question the credibility of any of the witnesses presented. In particular, Higgins noted that Teoh was not challenged by Michael Hodge QC on matters such as the decision to not build the network, as well as for a number of other matters including that there was no questioning of the commercial benefit of the merger.

One of the points raised by the ACCC in their submissions was that if the merger was stopped, would TPG consider building a new network. Higgins said the ACCC's case was that with a blocked merger, TPG would reconsider building a network. But this was based on predictions, suggestions, and probabilities that, Higgins said, was unchallenged by the ACCC and that Middleton would need to predict the future in a dynamic, changing market.

A significant part of the ACCC case is based on both facts and the counterfactual -- essentially a form of "if this, then that", Higgins said. Part of the ACCC's case is that if the merger is blocked, TPG will build a network. 

"You can't be Superman in the factual and Clark Kent in the counterfactual", said Higgins. "They don't like the answer so they're changing the question".

She dropped the hammer further by saying the ACCC was engaging on "regulatory paternalism". Not only is the ACCC telling TPG to build a network, said Higgins, but also what technology to use. The question that needs to be asked isn't whether TPG should continue building a network but whether it should start over, she posited. 

Given that TPG's initial plan was a 4G network using Huawei as its main supplier, if the company was to start today, it would be building a network that could be upgraded to 5G with new vendors that it doesn't have a commercial relationship with.

Higgins then reviewed the timeline of decisions made by TPG. The first was the 2017 decision to build a network. The following one was the ongoing decision to continue rolling out a network from April 2017 to January 2019. The third decision was the hypothetical call whether TPG would have continued to build a network had the security guidance to ban Huawei been revoked.

But it's a fourth decision, that Higgins said, the court would need to rule on. Would TPG pursue a network rollout where there was no way to upgrade to 5G? But with no product available that would work with TPG's proposed network design, Higgins said the answer to this could only be negative.

Middleton asked Higgins why TPG couldn't build a 5G network when Telstra was already deploying 5G. 

Higgins noted that the technology used by Telstra was different to that chosen by TPG -- macro networks rather than the small cells chosen by TPG -- so the nature of the networks are very different. TPG was relying on physically smaller units that fit on utility poles, something the equipment used by Telstra and Optus do not need to worry about. And equipment that work on utility poles do not deliver the network coverage and performance to compete with the larger carriers.

Saying the ACCC had its head in the sand, Higgins added that the technology TPG commenced its rollout with was allegedly flawed and there was no 5G solution available that worked with their plans. Changing hardware providers would also have resulted in a redesign if only to manage the different interference algorithms used by different manufacturers. Accommodating those changes would have allegedly added as much as 18 months to the planning of a new network, she said, and that would only give TPG a 4G network with little opportunity to upgrade to 5G.

She said this kind of temporal speculation had put things into a "forensic Tardis", relying on network equipment that doesn't exist yet.

One of the issues Higgins addressed was the revelation by TPG that the company continued looking at mobile networks even after the project was cancelled. But, following some questions by Middleton, it was suggested that TPG's engineering team continued to look at mobile technologies as a simple matter of continuing to keep appraised of market and technical developments.

The case is expected to conclude tomorrow with a decision by Justice Middleton expected in late 2019 or early 2020.

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