What's going on?
Vodafone – the British multinational telecoms company – announced an $11 billion merger of its Australian business with TPG Telecom on Thursday.
What does this mean?
The deal will see Vodafone’s Australian business (owned by Vodafone and Hong Kong-based CK Hutchison) own 50.1% of the new company, while its previous rival, TPG, will own the rest. Together, they want to form a company that can compete with the Australian mobile market’s two big players: Telstra and Optus. The new company will combine TPG’s two million broadband customers with Vodafone’s six million mobile customers, meaning they can lower costs and compete more effectively.
However, the deal’s still awaiting approval from regulators. They need to make sure it doesn’t make the market uncompetitive, potentially landing consumers with unfairly-inflated prices (if the deal goes through, the top three players would have around 80% market share).
Why should I care?
For markets: Costs down, shares up.
Investors in both companies were all smiles – Hutchison’s Australian shares jumped by 44% while TPG’s rose 18%. In theory, the merger will create a bigger, better company that only has to manage one operation, not two, saving costs in the process – now that they’re not spending money on competing with each other, they can save on marketing and stop cutting prices.
The bigger picture: Things are tough down under.
Australian telco companies have been under pressure recently with broadband providers’ profit falling because of the National Broadband Network rollout. The government scheme makes it easier and cheaper for people to get access to internet across Australia – therefore lowering company revenues (because consumers having access to more providers increases competition, and companies lower prices to be the most attractive). Now, Australian telcos are investing in new technologies (like 5G) to stay ahead of the competition and keep those prices high. Predictably, investing costs money – so anything companies can do to save cash will help them be more competitive in the future.