Vodafone and Hutchison merge Australian operations

Nathan Burley/Ovum
10 Feb 2009

We believe this deal is neither primarily a casualty of the global financial crisis, or the beginning of a 3G exit strategy for Hutchison, although it may raise prospects of more deals between the carriers. Rather this unique coming together of the third- and fourth-placed mobile operators in Australia will create a player with enough scale to compete in the Australian market.

Ovum has believed for some time that three national mobile network operators was the most likely long-term scenario in Australia. The combined scale of this new entity, with the global strengths of Vodafone and Hutchison, will provide the necessary elements for a third strong competitor able to compete and invest long-term in the Australian market place.

The merger of (near) equals, in a 50:50 joint venture is expected to close by mid-2009 subject to shareholder and regulatory approvals. The combined company will have over 6 million customers, revenues of ~A$4bn and an Australian mobile market share of 27%.

According the announcement the economies of scale across procurement, product development, IT, network, commercial operations and administrative expenses are expected to deliver NPV net synergies of opex and capex in excess of A$2 billion. Additionally, the combined distribution network with more points of presence will provide significant benefits.

The new operator plans to continue to compete as a value player. As the only focused pure-play mobile operator in Australia, against diversified rivals Telstra and Optus, it must build on the innovation and disruptive strategies of its challenging predecessors.

The operators' customers bases are largely complementary, 3 has strength in postpaid and non-voice while Vodafone has strength in prepaid. The new entity plans to adopt the Vodafone brand, transitioning customers away from the 3 brand. Vodafone globally and Hutchison locally from Orange to 3, has been through brand changes before and this experience will prove vital in minimizing churn.

Joint ventures

The merger will not be without challenges. Both Vodafone and Hutchison have existing network joint ventures with the two other mobile competitors in Australia. The new entity has stated that both ventures will continue to run as currently. However, no doubt in order to realize network savings some changes will be required in the medium term.

We believe the Vodafone-Optus joint venture will be simpler to unwind, since the 3GIS joint venture between Hutchison and Telstra includes all 2100MHz 3G spectrum and network assets. Vodafone Australia is also currently building 3G/HSPA to 95% of the population, based on 900MHz spectrum, while 3 Australia has a roaming agreement with Telstra for 3G services, at 850MHz, to 96% of the population.

Company mergers, brand changes, network integration, and duplication removal always create challenges. Both operators, especially 3, have significant momentum in the market, which they will be at pains not to interrupt.

The new operator must execute impeccably, minimizing impacts on end-users, to mitigate risks. At a time when both the industry is changing and there are questions over economic outlook, the global experience and expertise of the two parents will be priceless.

Nathan Burley, Analyst

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