Australia's TPG Telecom, Vodafone unite to take on rivals

SYDNEY (Reuters) - Australia's TPG Telecom Ltd TPM.AX agreed a merger with Vodafone Group's VOD.L Australian business on Wednesday, easing competition in the cut-throat sector and buying scale to take on bigger rivals Telstra Corp Ltd TLS.AX and Optus.

FILE PHOTO: A woman looks at her phone as she walks past an advertisement for Australia's TPG Telecom Ltd in central Sydney, Australia, April 12, 2017. REUTERS/Steven Saphore/File Photo

It combines Australia’s third- and fourth-largest telecom firms into a larger third player holding TPG’s fiber network and Vodafone’s mobile system, sending shares on both sides of the deal soaring.

The tie-up, to be called TPG, comes as Australia’s telco sector faces upheaval from the rollout of a government-owned broadband wholesaler, which has dented internet profitability and driven intense price competition in the mobile market.

“When you combine the fixed and mobile assets, the new TPG would be in a proper position to deal with Optus ... and a full-fleged telecom operation,” Bernstein analyst Samuel Chen told Reuters by phone.

It would also represent a “last chance” for Vodafone, which has struggled with network reliability issues since entering Australia in 1993, to make a serious bid for market share, he added.

The complex transaction hands TPG shareholders 49.9 percent of a new entity, which the companies say will have an implied enterprise value of A$15 billion ($11 billion). The rest is split evenly between Vodafone's two Australian owners, Vodafone Group and Hutchison Telecommunications (Australia) HTA.AX.

Shares in TPG jumped 15 percent to a near two-year high in early trade, while tightly-held Hutchison shares soared 48 percent to their highest price in 11 years. Telstra stock rose 2.5 percent and the broader market .AXJO rose 0.2 percent.

The companies promised synergies without quantifying them and said they would prepare a joint bid to buy 5G spectrum at a government auction in November.

“This merger creates the size, scale and financial strength for us to compete with the incumbents,” TPG Chief Executive Officer David Teoh told investors on a conference call.

Vodafone Hutchison Australia Chief Executive Officer Inaki Berroeta said: “We do mobile, they do fixed ... ultimately this combination is around synergies in the technology.”

Vodafone Group, Teoh and Hutchison would retain their holdings in the new company for at least two years, Vodafone said.

Berroeta would run the new company with Teoh as chairman, TPG Telecom and Vodafone Hutchison Australia said in a joint statement.

TPG’s board unanimously backed the merger, which requires shareholder and regulatory approval, and the companies said they hoped to complete it next year.

As part of the deal, TPG said it also would spin out its Singapore mobile business, separating it from the new merged company.

Reporting by Tom Westbrook in SYDNEY. Additional reporting by Devika Syamnath in BENGALURU; Editing by Chris Reese and Stephen Coates