Hutchison and Vodafone to Merge Australian Businesses

The joint venture, between Vodafone's Australian unit, Vodafone Australia Ltd, and Hutchison 3G Australia Pty Ltd, a unit of Hutchison Telecommunications (Australia) Ltd (Hutchison Australia), will be renamed VHA Pty Ltd, Dow Jones reports. Under the deal, VHA will market its products and services under the Vodafone brand, but will retain exclusive rights to use Hutchison's '3' brand in Australia. The two companies had combined revenues of around A$4 billion (US$2.7 billion) in the 12 months ending 30 June 2008. The venture is expected to generate synergies worth over A$2 billion and will be positive for both earnings per share and earnings before interest and tax from the first full year post-completion of the deal. It will be debt-free from the outset, with the exception of the A$500-million loan note, with Hutchison Australia to retain its debt on its own balance sheet, Hutchison Australia group finance director Frank Sixt said. Hutchison Australia's current chief executive, Nigel Dews, has been named chief executive of the joint venture, while Vodafone's current chief executive for Asia-Pacific and the Middle East, Nick Read, will be chairman. In recognition of the value difference between the two businesses, Vodafone will receive a deferred payment of A$500 million from VHA. The deal is subject to approval by Hutchison Australia shareholders, the Australian Competition & Consumer Commission (ACCC), and the Foreign Investment Review Board.

Outlook and Implications

• Increased Market Position: This deal will merge Australia's current third- and fourth-largest mobile operators to create a company with a greater business scale in order to compete more effectively in a highly competitive market where mobile penetration has reached around 110%. According to Hutchison Australia's current chief executive, the combined group will have a market share of between 25% and 27%, with around 6 million customers—4 million from Vodafone and 2 million from Hutchison. In comparison, Telstra has over 9 million customers, while Optus, the Australia unit of SingTel, has more than 7 million subscribers.
• Hutchison Records High Growth: Hutchison has been the fastest growing operator in terms of subscriber addition in recent years, with a subscriber growth of 28.7% (net subscriber addition of 403,000) for the year ending June 2008, compared to 10.6% (net subscriber addition of 357,000) for Vodafone, 6.4% (net subscriber addition of 436,000) for Optus and 1.3% (net subscriber addition of 123,000) for Telstra in the same period. Hutchison also has a strong base of 3G and contract customers, while the other operators have the majority of their customers on 2G networks and pre-paid plans.
• Focus on 3G: The move will also enable the combined group to better cope with the deteriorating business environment, as consumers cut back discretionary spending on mobile services amid the current economic downturn. The increased scale will give the group more leeway to cut costs and compete on low-margin operations. With the backing of both Vodafone and Hutchison Whampoa, the merged entity will have greater capacity for long-term investments in Australia. The focus of the group's investment plan will be on 3G, with ongoing investment in expanding the combined group's 3G network to reach around 95% of Australia's population. By comparison, Telstra claims that its Next G network, based on W-CDMA/HSDPA, now covers more than 98% of the population, while Optus has committed A$500 million to roll out a nationwide 3G mobile network, aiming to cover 96% of the population.