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Is Vodafone next on the telco auction block?

With Vocus swallowing Amcom and now merging with M2, and TPG consuming iiNet whole, Vodafone Australia looks likely to be the next telco bought out by a fixed-line provider.
Written by Corinne Reichert, Contributor

The news on Monday morning that fibre infrastructure company Vocus Communications plans to merge with telecommunications carrier M2 Group sparked new debate about the constant acquisition and reintegration among telcos in Australia and New Zealand, with many wondering when Vodafone's time will come.

Vocus and M2's "genuine merger of equals", as described by M2 CEO Geoff Horth, who will also serve as CEO of the merged company, will form the fourth-largest telco 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.

"There will be expanded geographic and market reach in both Australia and New Zealand, with multiple paths to market, including retail, above the line, digital, direct, and wholesale partners," said Craig Farrow, chairman of M2.

"The business will be backed by a portfolio of leading Australian brands, including Dodo, iPrimus, Commander, and Vocus. Brands in New Zealand include CallPlus, Slingshot, Flip, and Maxnet. The business will have significant network infrastructure in all major capital cities in Australia and New Zealand, together with global transmission capacity. This will include more than 1,600km of fibre, connected to more than 3,315 on-net buildings in Australia [and] 4,300km of fibre in New Zealand."

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.

Neither M2 nor Vocus foresee a problem with the regulators in either Australia or New Zealand, however, with Spence saying that a vertical integration of two separate telco businesses that do not compete directly with each other should not be an issue.

"We believe this strengthens the combined business and provides more competition, rather than less, so we would remain positive that there won't be an issue -- but obviously, it's open to the ACCC or the CommComm in New Zealand," added Vocus CEO James Spencely.

David Kennedy, research director of Telecoms at Ovum, agreed, saying the merge will improve the competition landscape in the region.

"The combined M2 and Vocus networks will provide a strong base for the provision of services to the enterprise and small business segments, and to small independent ISPs who purchase telecommunications capacity," Kennedy said.

"It is getting harder for small ISPs to find a wholesale provider who does not also compete with them in the retail market. In the mobile market, MVNOs must justify their existence by developing compelling offers in market segments and niches that the majors find hard to reach. This will happen in the fixed services market as well."

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 comes 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.

"While the ACCC was concerned that the acquisition of iiNet by TPG may lessen competition in the retail fixed broadband market, particularly in the short term, the ACCC concluded that this would not reach the threshold of a 'substantial' lessening of competition as required under section 50 of the Competition and Consumer Act," ACCC chairman Rod Sims said.

The consumer watchdog found that due to the continuing high level of competition within the fixed-line market from Telstra, Optus, and M2, the TPG-iiNet merger would not limit this -- as long as no other acquisitions are permitted in the future between these four companies.

"The ACCC has noted the growing consolidation in what will now become a relatively concentrated broadband market. Any future merger between two of the remaining four large suppliers of fixed broadband is likely to raise serious competition concerns," Sims said.

Vodafone is the last remaining significant telco provider that has yet to be acquired by a fixed-line provider, but this is likely to be remedied in the near future, according to Ovum analyst Kennedy, who predicted 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."

As the ACCC has yet to even consider the M2-Vocus merger, it is unknown whether a future possible acquisition of Vodafone would be approved -- particularly given the consumer watchdog's comments upon allowing the TPG-iiNet deal.

While Spencely did not rule out future acquisitions such as Vodafone, he said that for the present, the companies are focused on the merge.

"In terms of acquisition opportunities, I think right now, this is day one of this process. We're very much focused on getting this transaction across the line, maximising the return to shareholders, and attaining the synergies."

Spence was more open about the future, conceding that the newly minted Vocus Communications will be striving to increase its scale in an NBN and UFB world.

"We're very confident that we can continue to look at opportunities going ahead, acquire companies if they're complimentary to our strategy, and integrate them," Spence said.

Ovum's Kennedy, however, pointed out that the ACCC is wary about future acquisitions and the effect on competition and pricing for consumers.

"The merger between M2 and Vocus is consistent with the long-term trend towards consolidation in the telecommunications industry. However, attractive acquisition targets that can add significant scale are becoming fewer as the trend unfolds. The ACCC has warned that it will carefully scrutinise future mergers between major players," Kennedy said.

"We are in the consolidation endgame."

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