When three is better than four: Federal Court approves TPG / Vodafone merger

What you need to know

ACCC decision to oppose merger overturned  

• On 13 February 2020, the Federal Court (per Justice Middleton) decided that the proposed merger of Vodafone Hutchinson Pty Limited (Vodafone) and TPG Telecom (TPG) will not have the likely effect of substantially lessening competition in contravention of  section 50 of the Competition and Consumer Act 2010 (Cth) (CCA), reversing the ACCC's decision to oppose the transaction.
• Subject to any appeal by the ACCC, and securing clearance from the Foreign Investment Review Board, TPG and Vodafone can proceed to consummate the AUD 15 billion merger they announced 18 months ago.  Refer to our timeline diagram below. 

The case in a nutshell:  

• The retail mobile market in Australia, is dominated by three Mobile Network Operators (MNOs) – Telstra (41%), Optus (24%) and Vodafone (19%); TPG is one of many Virtual MNOs (retail providers who acquire wholesale services from MNOs) and has a market share of 3%.  
• The ACCC's case depended on satisfying the Court that, if the merger between TPG and Vodafone did not proceed, TPG, currently a maverick in fixed broadband (with significant 4G spectrum holdings and a previously announced intention to become an MNO), would roll out a fourth mobile network, which would constrain the incumbent MNOs.  
• Vodafone and TGP's case was that, without the merger, TPG would not roll out its own mobile network (no longer commercially viable following the Government's ban on Huawei 5G equipment) and Vodafone and TPG would remain second-class players.  

The Federal Court has ruled in Vodafone and TPG's favour, finding the merger will not be likely to substantially lessening competition in the retail mobile market   

• The Federal Court has granted declaratory relief to the parties, allowing the merger to proceed.  

• The reasons are not yet publicly available (due to confidentiality issues), and are expected to be published in the next two weeks.    

TPG's evidence was credible – TPG would not roll out a mobile network absent the merger.  The ACCC's counterfactual fails: 

• The ACCC was not successful in discrediting TPG's reasons for abandoning its mobile network and failed to show that, absent the merger, TPG could and would be likely to progress the rollout of a fourth mobile network in Australia and emerge as a strong competitive force against incumbent players.
• Justice Middleton was satisfied that it was no longer feasible for TPG to roll out a mobile network, and remarked that TPG's will and incentive to build a mobile network was now gone, and that while he "cannot be sure they won't change their minds" this was "extremely unlikely" and there was "no real chance of it occurring in the next 5 years". 

Three players are better than four  

• Justice Middleton commented that "it is not necessarily the number of competitors in the market, but the quality of competition that must be assessed".
• The Court accepted that without the merger, Vodafone's ability to compete successfully in the retail or wholesale mobile market will decrease.  Justice Middleton accepted that the merged entity would be more effective at constraining incumbent players Telstra and Optus. 

Parallels with T-Mobile / Sprint merger decision in the US  

• On 10 February, the US District Court rejected the challenge to the merger between the third and fourth largest national mobile carriers in the US, T-Mobile and Sprint.  Judge Marrero commented that the case "might well suffice to warrant injunction of mergers in more traditional industries", but that "a presumption of anticompetitive effects would be misleading in this particularly dynamic and rapidly changing industry".

ACCC may appeal   

• The ACCC has 28 days to lodge an appeal.  

ACCC is expected to ramp up its lobbying efforts for changes to merger laws    

• The decision continues the ACCC's losing record in litigation opposing mergers (which now stands at 0:7).  The ACCC's Chairman, Rod Sims, and Commissioners have expressed concerns that the hurdle for establishing that a proposed merger is anti-competitive is too high, and should be revisited.  

• We expect the ACCC to continue to advocate for changes to merger laws, including a "rebuttable presumption" that where a merger is likely to result in a significant increase in concentration in a market, the merger should be prevented from proceeding absent evidence to the contrary (similar to the position in the US).    
• The Government has already committed to undertake further consultation on the ACCC's recommendation (in its Final Report on the Digital Platforms Inquiry) that section 50(3) of the CCA be amended to include two additional merger factors (a) the likelihood that the acquisition would result in a potential competitor being removed from the market; and (b) the nature and significance of assets being acquired, including data and technology.

See our previous Competition Alert: https://www.ashurst.com/en/news-and-insights/legal-updates/accc-opposes-potential-4-to-3-merger-in-telecommunications-sector/

Author: Tihana Zuk, Counsel.