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Could a Merger Be in the Offing for Australia's Vodafone Hutchison and TPG Telecom?

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Could a Merger Be in the Offing for Australia's Vodafone Hutchison and TPG Telecom?

January 07, 2016

  By Peter Scott, TMCnet Contributor

In the competitive Australian telecom market, scale matters.

That’s because Australia’s fixed-line and mobile telecom providers are facing the prospect of significant profit margin erosion thanks to the Australian government’s $56 billion national broadband network, and competition is fierce.

With consumers having many options, telecoms have found that the best way to retain customers is through triple-play offerings of Internet, phone and content, as well as mobile services. But this favors large firms such as Telestra, which have the size to lock up big content deals that can attract subscribers.

This is a problem for smaller providers such as Vodafone (News - Alert) Hutchison and TPG Telecom, which are finding it hard to reach the scale to continue competing.

Recently there’s been talk that these two smaller providers might even merge to stay competitive.

TPG Telecom is Australia’s second-largest fixed broadband provider with more than 1.8 million subscribers. Vodafone Hutchison Australia has 5.2 million customers.

A merger of the two firms makes sense not only in terms of scale; Vodafone Hutchison could also benefit from the cost savings of shifting its mobile traffic onto TPG’s fiber optic network that runs through the major cities in Australia and overseas.

Further, both firms would benefit from being able to offer a wider range of premium and low-cost products across the mobile, fixed-line, media and corporate markets.

The two firms already are working together. Vodafone Australia made a $1 billion deal this past September to connect its base stations to a TPG-built fiber optic network and for TPG to switch its mobile reseller provider from Optus (News - Alert) to Vodafone Australia.

While a merger of the two firms might make sense, though, it may not happen in the short term thanks to a recent Vodafone infrastructure investment of $3 billion over the past three years. This might slow down shareholder enthusiasm, as the infrastructure gained by TPG might not feel quite as urgent.

At the same time, TPG executive chairman David Teoh likely would be resistant to giving up control of his firm.

So while scale matters in the Australian market, a dream merger between Vodafone Hutchison and TPG still feels like a long shot more than an inevitability.

Edited by Rory J. Thompson
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