It would also generate economies of scale to offset the margin squeeze occurring for fixed line resellers like TPG as the national broadband network nears completion of its rollout.
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They haven’t previously argued that the merger might be not just an escape route for TPG from that squeeze on its existing fixed line business but the salvation of a Vodafone business that has been chronically unprofitable.
Friday’s filing doesn’t make that case explicitly but the factual base for it is laid out.
Vodafone has been operating in this market since 1993,initially alone. In 2009 it merged its Australian business with Hutchison Telecom’s.
It is doubtful that Vodafone Australia has ever been profitable but since 2015,at least,it has been technically insolvent –its total liabilities ($9.11 billion) exceed its total assets ($8.19 billion). It survives because its debts are either guaranteed or provided by its two shareholders.
Over the past five years,according to its filing,they have invested about $4.6 billion in the business while incurring losses totalling $1.63 billion. The ACCC appears to believe that,absent the merger,they would continue to fund those losses and guarantee Vodafone Australia’s debt indefinitely.
To remain competitive with Telstra and Optus,Vodafone will have to upgrade its network to 5G.
Its existing 4G network also uses Huawei technology and it had planned to use Huawei’s leading edge 5G equipment to upgrade the network to 5G.
The government’s ban on the Chinese vendor means the upgrade,supposed to start last year,has been significantly delayed and will cost materially more,even as the relentless increases in the volumes of data carried on its 4G network continue to increase congestion.
Over the past five years,the average data downloaded onto mobile phones has increased roughly five-fold and data inclusions in mobile plans have soared even as average revenues per user have fallen.
Vodafone needs to make very large investments in 5G to be competitive with Telstra and Optus but there is no meaningful incremental return on those investments in prospect,at least in the near term.
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With a co-parent,Vodafone Plc,whose share price is trading at its lowest levels for nearly a decade and which has been exiting some markets (most recently New Zealand,where it was the market leader in mobiles),to focus on its European operations there is no guarantee that Vodafone and Hutchison will keep writing large cheques for a business that doesn’t make money.
If the merger were allowed,not only would the merged entity have a bigger and stronger balance sheet,greater customer mass and some operational synergies,it could use TPG’s spectrum holdings and the small cells that it has deployed to ameliorate its network congestion and expand its coverage.
The Vodafone challenge is unlikely to be heard until late this year but will be a test of the ACCC’s ability to regulate market structures that don’t exist today but which it believes (despite,in this case,TPG’s strong assertions to the contrary and the commercial logic that underpins them) might exist in future.