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Vodafone Hutchison jumps for bigger lifeboat

Vodafone Hutchison Australia has been in a form of limbo for years, with neither side willing to sell out for a price the other would accept.

ONE of the longest stalemates in Australian corporate history could be nearing a resolution.

Vodafone Hutchison Australia Pty, the joint venture between Vodafone plc and a unit of Victor Li's CK Hutchison Holdings Ltd that runs the nation's third-largest mobile network, is in talks to merge with homegrown challenger TPG Telecom Ltd, the companies said in statements on Wednesday.

That would be a merciful outcome for Vodafone Hutchison, which was created in 2009 through a 50-50 merger of the two operators' local businesses and has racked up about A$3 billion (S$3.01 billion) in net losses since 2012 alone. The company has been in a form of limbo for years, with neither side willing to sell out for a price the other would accept and a resulting lack of clear leadership that's left it saddled with an insolvent balance sheet.

Its Ebitda, at about A$976million in 2017, is greater than TPG's A$835 million, but with A$7.57 billion in net debt Vodafone Hutchison will be doing very well if it gets an equity value of more than A$1 billion in any deal. That compares with TPG's A$6.7 billion, after the stock surged 15 per cent on the announcement.

The move is the latest in a string of ambitious deals by TPG, founded by chairman David Teoh in 1986 and unrelated to the US private-equity group. Alongside the potential interest in taking over local wireless operator Amaysim Australia Ltd by Singapore Telecommunications Ltd, or SingTel, it's also a sign that Australia's telecommunications sector is on the verge of a fresh wave of consolidation as a government-owned fixed-fibre network increases competition.

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The National Broadband Network, run by NBN Co, will cost around A$49 billion once completed but has been delivering speeds slower than those in Kenya.

The country's three mobile network operators - market leader Telstra Corp, SingTel-owned Optus, and Vodafone Hutchison - have viewed the NBN's botched rollout as an opportunity. With most existing fixed-line services being forcibly migrated to the NBN's high-cost, low-quality network, they've been preparing to invest in 5G mobile services as a potentially more attractive alternative.

Even TPG, which has long been a fixed-line operator that only offers mobile by acting as a reseller on Vodafone Hutchison's network, is building out its own mobile capacity that could eventually upgrade to 5G.

The risk to all those companies is that the NBN's problems force a resolution. If takeup of the services is poor enough, the company will be compelled to write down the business as a whole and offer more competitive pricing on the access fees it charges retail telcos for space on the network. That in turn would tip the balance back in favour of fixed-line connections, threatening returns on the retail players' mobile expansions.

That's the best way to understand what's happening in the country's telco sector now. On the off-chance that the NBN avoids a writedown, Telstra, Optus, Vodafone Hutchison and TPG will still need to find ways to consolidate, as a way of winning some margin to pay for the arms race to provide competitive mobile broadband. Should its investments be impaired, the broadband market will be even more competitive, and mergers will be still more necessary.

Whether Teoh can break the Gordian knot at the heart of Vodafone Hutchison is another matter, especially as narrowing losses may encourage its owners to believe the business is on the brink of breaking even and merits a generous price.

Still, it should be obvious now that Australia's telcos must either get big, or get out, so a merger seems the best way forward. The coming market is no place for minnows. BLOOMBERG

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