Vodafone, Hutch to merge in Australian arms

Vodafone and Hutchison Telecommunications (Australia) Ltd, a listed subsidiary of Hutchison Whampoa Ltd, have announced a merger of their telecommunications businesses in Australia, Vodafone Australia Ltd and Hutchison 3G Australia Pty Ltd, which delivers its mobile services under the "3" brand.

Both Vodafone and HTAL will have an equal ownership of 50 per cent in the joint venture, which will be renamed VHA Pty Ltd

Under the deal, VHA will market its products and services under the Vodafone brand, but will retain exclusive rights to use the 3 brand in Australia during a transition period and thereafter. To equalise the value difference between the respective businesses, Vodafone will receive a deferred payment ofA$500 million from VHA.

 The move creates a company with 6 million customers and combined annual revenue of A$4 billion ($2.7 billion), close in scale to Australia's two dominant mobile companies, Telstra Corp and Optus, owned by Singapore Telecommunications. The joint venture aims to provide a range of mobile services to 95 per cent of the population.

 Vodafone has about 4.2 million customers and had earnings before interest, tax, depreciation and amortisation (EBITDA) of A$499 million in the year to March 30, 2008. Hutchison had EBITDA of A$173 million in the year to June 30, 2008. In comparision, Telstra has annual mobile revenues of around $A5.5 billion, while SingTel Optus' revenues are more than $4 billion.

 Combining the third- and fourth-largest wireless operators in Australia creates a company with A$4 billion in annual sales, 10 per cent shy of second-ranked Optus. Nick Read, chief executive officer of Vodafone's Asia- Pacific and Middle East operations, will be chairman of VHA, while Hutchison Telecommunications CEO Nigel Dews will take over as VHA's CEO.

 Vodafone, the world's largest mobile-phone operator, accounted for 18 per cent of Australia's A$13 billion mobile-phone market last year, while Hong Kong billionaire Li Ka-shing's Hutchison had nine per cent, according to Nathan Burley, a Melbourne-based analyst at market research firm Ovum. Telstra had a market share of 41 per cent and Optus 32 per cent, according to Burley.

Hutchison's Sydney-based unit lost A$3.12 billion from 2000 to 2007, according to data compiled by Bloomberg. The wireless operator earned A$2.28 million in 1999, the only year it was profitable, based on available data.

 The transaction is expected to be positive to Vodafone, Hutchison and parent Hutchison Whampoa Ltd.'s earnings, according to the two companies' statement, but did not give details. The deal is scheduled to be completed by mid-year, subject to the regulatory and shareholder approval, according to the statement.

 Commenting on the transaction, Vittorio Colao, chief executive of Vodafone, said, "This transaction will benefit customers in Australia as it creates a company with the necessary scale to compete strongly in the mobile market. Customers can look forward to a wider portfolio of voice and data services, delivered under the Vodafone brand over a high quality network, which through ongoing investment will bring 3G coverage to around 95 per cent of the population. This is an important step in the transformation of the Australian mobile industry."

The in-market nature of the transaction is expected to create significant value. Economies of scale across procurement, product development, IT, network, commercial operations and administrative expenses are expected to deliver major cost savings. The net present value of operating expense and capital expenditure synergies is currently expected to be in excess of A$2 billion, net of integration costs.

The transaction is expected to enhance HTAL's and Vodafone's adjusted earnings per share, as well as to the consolidated EBIT performance of Hutchison Whampoa's 3 Group, from the first full year post completion (after synergies and excluding the impact of intangible asset amortisation and one-off costs).