Business Watch: Voda and 3 tie knot

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There’s major telecoms news this month from Down Under, where Vodafone and 3 Australia have announced plans to combine their companies.

In one of the first deals since he took over as Vodafone chief executive last year, Vittorio Colao says the deal could generate savings of A$2 billion (£915m) over a period of time.

Analysts are predicting a possible flurry of in-country consolidation across the world in the coming years, as networks seek to take huge chunks of costs out of their businesses to save money and protect revenues in the face of declining call prices.

Some say the UK could be next, with Italy – where both Vodafone and 3 operate – also ripe for consolidation.

Serious doubts have also been raised over the future of the 3 brand globally. Vodafone will take over as the brand name under the new Australian entity, which will have the corporate name VHA. The 3 brand in Australia will ultimately disappear.

Some experts reckon the deal could be seen as the start of a possible exit strategy by 3’s ultimate parent Hutchison Whampoa, controlled by Hong Kong billionaire Li Ka-shing. That remains to be seen.

What is clear is that there is a pressing need for Vodafone and 3 to combine in Australia, and here’s why.

Australia has a population of 21 million spread over a surface area about the same size as the moon. The economics of having four competing mobile phone network operators simply don’t stack up, because the returns do not support the necessary investment.

Vodafone and 3 have found this out to their cost. As the new entrants they have struggled to make serious headway against the incumbents Telstra, the former phone monopoly, and Optus, which was once owned by Britain’s Cable & Wireless but is now owned by Singapore Telecom.

Telstra dominates with 42.2 per cent of all mobile customers, while Optus has 32.7 per cent. That leaves Vodafone with just 16.9 per cent and 3 with a piddling 9.2 per cent.

A combined Vodafone and 3 would have 25.1 per cent. That would give them much greater purchasing power with handset and equipment vendors.

Nathan Burley, analyst at industry watchers Ovum said: “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 3rd and 4th placed mobile operators in Australia will create a new player with enough scale to sustainably compete in the Australian market.”

Merging would allow Vodafone and 3 to cut hundreds of jobs from their combined 3,700 workforce while closing dozens of their 400 retail outlets.

It would also take a competitor out of the market place. As Christian Guerra, telecoms analyst at Goldman Sachs wrote in a note to clients:

“The key here is the improvement in scale for the new entity, VHA.

“The fixed cost nature of the telecoms industry means scale (i.e. customer numbers) is critical for sustainable profitability. The improved scale should lead to more rational mobile pricing.”

Nick Read, the former Vodafone UK chief executive who was asked by Colao last year to head up its Asia Pacific and Middle Eastern businesses, said another catalyst was the looming arrival of LTE as a new standard to replace the various 3G standards.

The news that Hutchison is happy to give up on the 3 brand Down Under has raised speculation about its long term plans in the UK, where it has just four million customers under Kevin Russell, former 3 Australia chief.

It’s a year since Hutchison sold its interests in its in Indian mobile phone business Hutchison Essar to Vodafone, but this is the first time the two companies have agreed on a 50:50 joint venture.

Vodafone has played down speculation of similar deals between the two companies elsewhere, such as the UK and Italy. The company has a stated target to be the number one or two player in countries where it operates so Australia, where it is a distant third, was an obvious target – that is not the case in the UK or Italy.

Interestingly, both companies have network sharing deals – 3 with Telstra and Vodafone with Optus – which they are confident will not be a barrier to the merger.

Full article in Mobile News 433 (February 23, 2009).

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