Earlier this week, the scheme booklet [PDF] for the proposed merger of TPG and Vodafone Hutchison Australia (VHA) was released to the Australian Securities Exchange (ASX).
The document is a hefty 350-page affair that provides insight into the two parties involved in this transaction: One, a non-reporting half-owned arm of the multi-tentacled Vodafone Group; the other, a secretive yet publicly-listed entity that started out flogging computer parts over two decades ago.
Going through the booklet provides the clearest view on the transaction, which is fast approaching the second anniversary of its announcement.
In simple terms, TPG and VHA will combine forces to create a much bigger third, vertically integrated player in the Australian telco market.
TPG is missing a proper mobile arm and Vodafone is missing a proper fixed line footprint. This transaction complements the ambitions of both companies.
When complete, VHA shareholders will have 50.1% of the new company and TPG will have the remaining 49.9% of the company. The new company will be called TPG Telecom Limited.
Current Vodafone boss Inaki Berroeta will serve as CEO and current TPG chief David Teoh will serve as chair.
A hypothetical year-end statement put the revenue of the merged company at AU$5.9 billion, earnings before interest, tax, depreciation, and amortisation (EBITDA) at $1.98 billion, which would lead to pre-tax profit of AU$420.5 million and post-tax profit of AU$293.5 million.
The new company would have AU$16.3 billion in total assets with AU$7.71 billion in total liabilities against that.
While a merger is easy enough in theory, how the actual transaction plays out on the accounting documents is another situation altogether.
In accounting terms, Vodafone will swallow TPG and then rename itself to TPG.
The logic behind this would appear to be that Vodafone has a number of international agreements and deals for everything from its brand names, retail network, to procurement and IT services, meaning it is easier to move TPG onto that contractual infrastructure than the other way around.
As part of the transaction, VHA will be restructured and move from being a proprietary to a public company. VHA will acquire 100% of TPG's shares, which will turn TPG into a wholly-owned subsidiary. TPG shareholders will then get back in return one share of the newly-merged company for each TPG share they own.
As it is being acquired, TPG will be delisted from the ASX under the TPM ticker, with the merged company to then be listed under a TPG ticker symbol.
"It is intended that the Merged Co will be called TPG Telecom Limited and that TPG's existing business units will be integrated into VHA's corporate structure," the booklet states.
TPG, as it is known today, will become TPG Corporation Limited, with the registered address of the merger business to be in North Sydney where Vodafone Australia's office is.
The board of the merged company will have five ex-VHA people on it -- Canning Fok, Pierre Klotz, Diego Massidda, Inaki Berroeta, and Frank Sixt -- with three from TPG in the form of David Teoh, Shane Teoh, and Robert Millner. Two independent directors -- Dr Helen Nugent, who is chairman of Ausgrid and the National Disability Insurance Agency and a non-executive director of IAG, and Arlene Tansey, non-executive director at Aristocrat, Healius, Infrastructure NSW, and Lend Lease -- will also join the board.
Once the dust settles for this deal, the current 50-50 owners of VHA -- which through a series of subsidiaries effectively resolves to Vodafone Group on one side and the Cayman Islands-based CK Hutchison Holdings on the other -- will have a 50.1% share; David Teoh and associates will have a 17.12% share, and the Washington H Soul Pattinson company will have 12.61% control. These parties have all entered an escrow agreement to not sell shares for two years.
The remaining share will be held by TPG shareholders.
According to the booklet, Vodafone Group and Hutchison Telecommunications Australia will have a "look-through economic interest of 25.05%" in the merged company.
The reality isn't that simple though, with a new UK-incorporated joint venture company holding no more than 39% of the company, and Vodafone Oceania and Hutchison 3G Holdings having at least 5.55% each, but such are the games with subsidiaries.
There are also a number of obligations that the new company will have to hold, thanks to TPG having a subsea cable going through Guam.
The obligation to the Committee on Foreign Investment in the United States involves signing a national security agreement; and having a "security director" who is an independent director on the board with US citizenship only and holds an active US personnel security clearance. It also demands the company has a security officer who is responsible for compliance and reporting. Both the people in those roles need to be approved by foreign investment committee monitoring agencies.
The new company must also disclose to the monitoring agencies if a foreign entity or individual is likely to get a 5% ownership stake, as well report within 24 hours to the monitoring agencies if there is any "unauthorised access to, or disruption or corruption of the cable system".
Additionally, CK Hutchison Holdings is not to hold a greater than 25.05% share of the merged company in the future, nor have control of 20% of seats or votes of the board.
Throughout the booklet, the companies state that they will be going to market with a menagerie of brands, and will continue operations as is.
One of the aforementioned agreements that Vodafone has, is for the brand name itself, and the company cannot give a concrete response as to whether it will use it in the future.
"VHA entered into a brand licence agreement on 9 June 2009 with Vodafone Ireland Marketing Limited, later transferred to Vodafone Sales & Services Limited, under which VHA has the non-exclusive right to use the Vodafone brand in Australia. VSSL is a wholly-owned indirect Subsidiary of [Vodafone Group]," the booklet said.
"On implementation of the scheme, the existing brand licence agreement will terminate and the Merged Co and VSSL will enter into a new trademark licence agreement under which VHA will continue to have the non-exclusive right to use the Vodafone brand in Australia for a 10-year term."
With this new deal, the new TPG will be required to pay AU$27.5 million each year, as well as be "subject to various undertakings relating to its use of the Vodafone brand".
The booklet warns there is no assurance that it will continue to gain brand licences.
Yes and no. Yes, because Vodafone is clearly the biggest brand, and no, because it also has similar deals with Kogan and Lebara.
It turns out that Kogan Mobile and Kogan Internet are a Vodafone-in-Kogan-clothing style arrangement. A peek into Kogan Mobile's terms and conditions show that invoices come from Vodafone, which operates the brand.
"VHA is a licensee of the Kogan brand and is responsible for providing all aspects of service delivery, including the use of its mobile network and customer service operations. Kogan Mobile customers contract with a VHA Group company for their mobile service," the booklet states.
"In the year ended 31 December 2019, approximately 2% of the VHA Group's operating revenue was attributable to Kogan Mobile-branded prepaid services."
A similar branding arrangement is in place with Lebara, although in this case, Vodafone outright purchased the virtual operator's assets in September 2016.
Lebara is responsible for around 1% of Vodafone Australia's operating revenue.
The new TPG will be an Australian-focused entity, with TPG to demerge from its business in Singapore, and its shares to be distributed amongst TPG shareholders.
This part of the business is responsible for AU$1.1 million in revenue, has AU$3.8 million in cash or cash equivalents, AU$230 million in equipment, and AU$174 million in spectrum assets. The Singapore operation currently has a AU$112 million cash inflow from its parent.
A transitional service agreement will be in place during the demerger, where TPG will continue to provide, for up to three years, services including IT support and software provisioning, along with network services such as design, operation and access control configuration, corporate telephony support, and "value-added services support".
The Singapore business will get a TPG brand licence for up to two years, pending rebranding of the business, and will be listed on the ASX under the TUA ticker symbol.
TPG Singapore had 416,000 users on its network as part of a free trial, but after charging for services, that number was down to 7,000 paying customers by the end of April.
The booklet spells out the types of arrangements that Vodafone Australia has, and frankly, it is quite a contractual web that has been weaved. There are the brand arrangements mentioned above, but there are so many more.
As part of the merger agreement, both parties are to come to the table with AU$2.24 billion of debt -- and both companies are approaching it from different directions.
TPG will be handing out a special dividend to its shareholders to lower its cash level, because its net debt isn't high enough.
Whereas Vodafone had AU$6.1 billion in net debt at the end of 2019. As part of its restructure, part of its debt will be transferred out of VHA and onto Vodafone Group and Hutchison Australia.
At the same time, led by ANZ bank, the merged company will have a AU$2.57 billion three-year loan, a AU$1.72 billion five-year loan, and a revolving AU$960 million loan facility.
TPG is a profitable company that recorded almost AU$2.5 billion in revenue for the full year to July 31, which translated into AU$809 million in EBITDA, and net profit of AU$175 million. By the end of its 2020 first half, it had AU$5.47 billion in consolidated total assets and AU$3 billion in net assets.
Its market capitalisation is AU$6.68 billion, and the company employs 4,700 people across Australia, New Zealand, the Philippines, Malaysia, and Singapore.
The company has over 27,000 kilometres of fibre laid around Australia. It also offers fibre-to-the-basement services to 200,000 premises in direct competition to the National Broadband Network.
As of January, TPG has over 1.9 million consumer fixed broadband subscribers and approximately 400,000 mobile phone subscribers. With its consumer base shifting from on-net services to the NBN, TPG's consumer profitability is expected to contract.
For every ADSL user that shifts to the NBN, a Lonergan Edwards report attached to the booklet said TPG loses AU$17.17 in margin each month.
For its 2019 full year, VHA posted yet another net loss, this time recording that it went into the hole for AU$279 million. Its revenue decreased by 3% to AU$3.52 billion, while EBITDA was up 7% to AU$1.18 billion.
The company has AU$8.75 billion in net assets, employs 2,050 people, and has some handy tax benefits to bring the merger.
"As at 31 December 2019, VHA had tax losses of $4.36 billion (providing a future tax benefit of up to $1.3 billion). As a result, VHA is unlikely to pay corporate income tax, subject to the satisfaction of the tax loss utilisation rules, for many years," Lonergan Edwards said.
The company has around 5.7 million mobile customers and 144,000 fixed line customers.
Vodafone Australia's mobile network consisted of approximately 5,613 mobile sites at the end of 2019. This included 5,132 macro sites, 436 in-building coverage, and 45 small cells. Of those sites, there are 467 where Vodafone owns the pole, tower, or other structure.
Vodafone has a retail footprint consisting of 99 company-owned stores; 113 exclusive Vodafone stores that are owned and operated by third parties; 54 exclusive Vodafone stores that are operated by third parties; 22 Apple stores doing indirect sales; 33 Vodafone Business Centres/Dealers run by third parties; 62 Mo's Mobiles stores that are exclusive Vodafone stores; 69 independent non-exclusive stores; and approximately 23,600 mass-market stores made up of petrol and convenience stores, Coles, Woolworths, Kmart, Officeworks, BIG W, and 7-11 outlets.
The company also has significant spectrum holdings.
As the company shifts to 5G, all Huawei equipment in the transmission network that handles 5G traffic will be replaced by Nokia equipment. The transmission network is made up of 3,243 leased fibre connections, 1,318 Ethernet leased lines, and 1,135 microwave radio links.
In 2017, the company entered into an agreement with Ericsson, with Cisco as a subcontractor, to virtualise its IP and core networks.
Vodafone also runs the only paging network still operating in Australia, and its paging and messaging business has around 2,500 customers with AU$11 million in yearly revenue.
"The paging network is near end-of-life, and VHA is evaluating options for its future which may include ceasing its operations in the near term," the booklet said.
Both companies said that COVID-19 had affected them.
TPG said it had seen a small increase in fixed line broadband sales, a jump in data use during the day, and needed to cater for remote work.
"The COVID-19 pandemic continues to evolve and TPG considers it reasonably likely that its business will be affected in other ways, including increased bad debt risk due to customers facing financial distress caused by the pandemic, and possible decline in corporate customer revenue arising from forced business closures and customers seeking lower cost services," the booklet said.
Conversely, Vodafone said it had seen a decrease in mobile sales across both pre-paid and postpaid offerings, that it had needed to close some retails outlets, and a lack of overseas travel and roaming fees would all result in lower revenue.
Due to coronavirus, Tech Mahindra was unable to fulfil its outsourced customer service obligations, and work had to be shifted to Vodafone's Hobart contact centre, which is normally reserved for "end-to-end customer management for more complex customer interactions".
Vodafone said it had also seen an increase in data usage during the day.
Lonergan Edwards added both companies would have lower earnings due to COVID-19 over the next few years.
Lonergan Edwards backs the recommendation of the companies that the merger is a good one. The firm assessed that in terms of equity to be contributed to the merged company, VHA will bring between AU$4.41 billion and AU$5.06 billion, while TPG will bring AU$4.29 billion and AU$4.99 billion.
In percentage terms, this means Vodafone Australia is bringing between 50.4% and 50.7% of the combined equity for a 50.1% stake. For this reason, Lonergan Edwards said the deal was a good one for TPG shareholders.
Since the earliest days of the transaction, it has been expected that the combined entity would be much better placed to handle its competition.
The imagery of the Telstra behemoth being buzzed by a mosquito swarm of brands -- such as iiNet, Kogan, Internode, as well as TPG and Vodafone -- should not be dismissed.
The deal will go before TPG shareholders in a scheme meeting on June 24, where it needs to clear the bar of a majority of TPG shareholders, as well as garner more than 75% of votes cast at the meeting.
If successful, TPG is expected to be delisted from the ASX on June 29, with the merged entity to list the next day with deferred settlements.
July 13 is pinned as the date implementation will occur, and dividends by TPG are paid, before the new entity begins regular ASX trading on July 14.
In the meantime, Vodafone will be restructuring and preparing to become a public company.