Combining forces is more competitive… 

The proposed merger of Vodafone and TPG hit the news recently, when the Federal Court permitted the merger to proceed, effectively over ruling the ACCC’s earlier rejection of the proposal. In a reversal for the ACCC, the Court found the merger would potentially even enhance competition.¹

This case demonstrates the importance of carefully considering the competition aspects of a merger, particularly where the merger is taking place between competitors in a concentrated market.

Background

Vodafone Hutchison Australia Pty Limited (VHA) was one of three mobile network operators in Australia.  VHA was operated as a joint venture by Vodafone Group Plc and Hutchison Telecommunications (Australia) Ltd..   TPG Telecom Limited (TPG) primarily operated in the fixed-line market, being a well known supplier of internet and other fixed line services.

In April 2017, TPG took initial steps to become Australia’s fourth mobile network operator, spending about $1.2 billion on acquiring the 700 MHz spectrum.  However TPG abandoned those plans due to changing regulatory conditions.

In August 2018, VHA and TPG announced plans to merge, by way of a scheme of arrangement.  Following the merger, VHA’s former shareholders would hold 50.1% of the shares in the merged entity, and TPG shareholders would own the rest.  David Teoh, the TPG chair, would become the non-executive chair and Vodaphone’s current CEO, Berroeta, would become the CEO and Managing Director.

What was the legal principle at stake?

The ACCC rejected the merger application and, when the parties took legal proceedings, opposed the merger in those proceedings.  The ACCC’s objection was based on section 50 of the Competition and Consumer Act 2010 (CCA), which prevents two companies merging where this would have the effect, or would be likely to have the effect, of substantially lessening competition in any market.

The ACCC argued that Telstra, Optus and VHA already controlled about 90% of the Australian mobile market and that TPG presented the best prospect to develop a competitive fourth mobile network operator in Australia, to the benefit of Australian consumers.

Section 50 cases are notoriously difficult to resolve, as the decision maker must consider how the relevant market(s) would operate in the alternative scenarios where the merger is, or is not, allowed.  This case hinged on the following questions:

1. Would TPG roll out a mobile network without the merger?
2. If so, how competitive would TPG be with the other three mobile network operators?
3. In the absence of the merger, how meaningfully would VHA and TPG be able to compete with Telstra and Optus?

Decision

Justice Middleton in the Federal Court found (in a judgment that is not yet fully available to the public) that he accepted the evidence from Mr Teoh that TPG would not roll out a mobile network operation without the merger.  The window of opportunity for TPG to do so in 2017 had passed.

Further, the judge accepted that as separate entities, neither company was likely to be competitive against Telstra and Optus in a way that would generate change in the relevant market.  The Court described VHA impact as unchanged, and TPG’s presence in the retail mobile market as likely to be “lack-lustre“.

Justice Middleton considered that what mattered was not the number of competitors in the market but the quality of those competitors.  He concluded that the merger would not have the effect, or be likely to have the effect, of substantially lessening competition in the Australian retail mobile market.  In fact, he suggested that, by combining their complementary assets, the merged companies would be better able to compete with Telstra and Optus.

ACCC chair Rod Sims’ response to the judgment was that: “Australian consumers have lost a once-in-a-generation opportunity for stronger competition and cheaper mobile telecommunications services with this merger now allowed to proceed… we know that competition is lost when main incumbents acquire innovative new competitors.”²

Overseas authority

It’s interesting to note that the US courts have recently considered a similar case in the mobile industry in that country, and allowed the T-Mobile/Sprint merger and acquisition to go ahead.  In that decision, the US Courts came to a parallel conclusion that allowing a takeover would result in three players of more equal strength.

Key messages:

Together, these decisions seem to suggest a judicial view that rapid technological changes require agile business models, particularly in the challenging mobile industry.

Broadly, the ACCC contended that a reduction from three to four mobile operators would reduce competition and, in any event, TPG would be sufficiently competitive in this space.  However, the Court disagreed, finding that, since TPG did not plan to compete in the mobile market in the absence of a merger, there would be no such reduction in competition as a result of the merger; and, indeed, the creation of a merged fixed line/mobile operator would be pro-competitive.

The ACCC remains adamant that it will review mergers assiduously for anti-competitive behaviour.  Parties looking to merge, particularly competitors in a concentrated market, should consider these issues carefully before proceeding.

1 Vodafone Hutchison Australia Pty Limited (ACN 096 304 620) v Australian Competition and Consumer Commission and another, Federal Court of Australia, No. NSD818/2019.

2 https://www.accc.gov.au/media-release/federal-court-allows-tpg-vodafone-merger