New Beginning: Vodafone Group Announces Merger Between VHA and TPG

Vodafone Group Plc has announced that Vodafone Hutchison Australia Pty Limited (“VHA”) and TPG Telecom Limited (“TPG”) have agreed a merger to establish a new fully integrated telecommunications operator in Australia (“MergeCo”).

The merger brings together leading talent in Australia’s mobile and fixed broadband sectors and accelerates the benefits of the substantial network investments made by both companies.

The merged company will be a more powerful challenger to Telstra and Optus in Australia, with an integrated fixed and mobile offering. It will also be better able to invest in next generation mobile and fixed networks and drive innovation, service and product improvements to benefit Australian telecoms customers.

Vodafone and Hutchison Telecommunications (Australia) Limited (“HTAL”) will each own an economic interest of 25.05% in MergeCo, with TPG shareholders owning the remaining 49.9%. The Board of MergeCo will comprise: David Teoh, as Chairman (currently CEO and Chairman of TPG), Iñaki Berroeta as Managing Director and CEO (current CEO of VHA), existing TPG directors Robert Millner and Shane Teoh, two nominees of Vodafone, two nominees of HTAL, and two new independent directors. MergeCo will be listed on the Australian Securities Exchange (ASX) and called TPG Telecom Limited. There are no changes currently planned to any of the existing brands of either VHA or TPG.

The merger is expected to generate substantial cost synergies from the combination of two complementary networks, rationalisation of duplicated costs and economies of scale. Additionally, the combined entity will benefit from revenue synergies through cross-selling of products across both VHA and TPG’s corporate and consumer customer bases.

The agreed merger ratio implies an enterprise value for VHA of A$7.5 billion. This is equivalent to valuing VHA at 7.4x EV/LTM June 2018 EBITDA and 19.2x EV/LTM June 2018 operating free cash flow (OpFCF). MergeCo will have a pro forma enterprise value of approximately A$15.0 billion, revenue of over A$6.0 billion, EBITDA of over A$1.8 billion and OpFCF of A$0.9 billion. Approximately A$2.0 billion of VHA’s existing debt will be contributed to MergeCo, which will have pro-forma leverage of approximately 2.2x net debt/EBITDA[i] and an expected strong investment grade credit profile. The strong cash generation of the combined entity is expected to support an attractive dividend. It is intended that MergeCo will pay a dividend of at least 50% of net profit after tax adjusted for one-off restructuring costs and certain non-cash items (“Adjusted NPAT”)[ii] and have a medium-term target leverage range of 1.5-2.0x net debt/EBITDA. Vodafone’s interest in MergeCo will be accounted for under the equity method.

Vodafone and HTAL’s shareholdings in MergeCo, and the remaining VHA net debt of approximately A$4.8 billion that will not be contributed into the merged company, will primarily be held through an entity jointly owned by the Vodafone Group and HTAL. Debt held through this entity will be serviced by dividends from MergeCo, and will not be consolidated by Vodafone or HTAL. Vodafone will provide a guarantee on approximately A$2.4bn of this debt, lower than the approximately A$3.3 billion guarantee that Vodafone currently provides for VHA’s debt.

Vodafone, HTAL and David Teoh have entered into a 24 month standstill arrangement in relation to their shareholdings in the combined business.

Nick Read, CEO-designate, Vodafone, said: “This transaction accelerates Vodafone’s converged communications strategy in Australia and is consistent with our proactive approach to enhance the value of our portfolio of businesses. The combined listed company will be a more capable challenger to Telstra and Optus, and will be much better placed to invest in next generation mobile and fixed line services to benefit Australian consumers and businesses.”

In parallel to the merger agreement, TPG and VHA have signed a separate Joint Venture Agreement. The scope of the joint venture is to acquire, hold and licence 3.6 GHz spectrum. The Government is auctioning 125 MHz of 3.6 GHz band spectrum, with the auction expected to commence in late November 2018. The joint venture will register as a participant in the auction. In addition, the parties will negotiate with the aim of expanding the business of the joint venture in future, including to acquire future spectrum licenses and/or facilitate various forms of efficient spectrum and network sharing including a shared 5G Radio Access Network. The Joint Venture Agreement is ongoing, and will not terminate if the merger fails to proceed.