Would a 2degrees-Vocus merger pass muster with the Commerce Commission? Experts’ verdict

If a merger between 2degrees and Vocus NZ is put before the Commerce Commission, would it pass muster?

Experts canvassed by the Herald say it would not only pass the key Commerce Act test of whether it would “substantially lessen competition”.

And that, in fact, it would enhance competition in the telecommunications market by creating a more powerful competitor to number one and two players Spark and Vodafone – and that it has the potential to benefit consumers in the power market, too.

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2degrees’ Toronto-listed majority owner Trilogy International Partners was placed in a trading halt at 8.09am yesterday, pending news.

After the close of trading, Trilogy released a brief statement confirming it was “pausing activity” on 2degrees’ IPO “in order to consider a possible alternative transaction with another party”.

The other party was not named. A well-placed source in the M&A community, told the Herald yesterday it was Australasian telco Vocus Group, which also has – or had – plans for an IPO for its NZ arm by year’s end.

A rep for Trilogy declined further comment. In its stock exchange statement, the company said it expected to provide additional details in the next several days.”

“2degrees is strong as a mobile operator, but not as strong in broadband. With Vocus, it’s the other way around. They’re strong on broadband and not very strong at all on mobile,” economist and AUT senior research fellow Dr Richard Meade says.

“So if you bring them together, you’re potentially making a more effective competitor for the main players,” Meade says.

Associate Professor Chris Noonan, who lectures in competition and company law at Auckland University, also saw little prospect that the ComCom would attempt to block a 2degree-Vocus deal.

“Vertical mergers tend to be less of a problem under the Commerce Act than horizontal mergers. Without the merged entity not having significant market power in either market, a vertical merger is unlikely to be prevented by the Commerce Act,” Noonan said.

2degrees is also about to start its 5G upgrade, and Vocus’s nationwide fibre backbone network could be a natural complement, the AUT academic says.

“And, interestingly, they might begin to compete with Trustpower and Contact as well. [Vocus-owned] Slingshot and Orcon offer power as well.So if you bundle up 2degrees with them, then you’ve got something that’s starting to look like it’s competing with both of the main telco companies, and also some other power companies,” Meade adds.

“That suggests we’re going in the opposite direction to listening competition.”

Vocus bought power retailer Switch Utilities in 2018, and now bundles power with Orcon and Slingshot broadband. Electricity Authority stats for August 2021 show Vocus has just under 40,000 power customers.

In broadband, Vocus’s NZ operation has around 226,000 customers between its Orcon, Slingshot and Stuff Fibre brands – that puts it in the number three position behind Spark (just over 700,000) and Vodafone (around 400,000) but ahead of 2degrees (139,000) andTrustpower (112,000).

It also has a wholesale arm provisions Sky TV’s new broadband service, behind the scenes, and a nationwide backbone network that runs to some 4200km of fibre.

Vocus has a sub-1 per cent market share in mobile, where it relies on a wholesale deal with Spark.

2degrees has a much chunkier market share in mobile – around 20 per cent by total connections. But more than a decade after its launch, it is still strongest in consumer mobile, and according to market research IDC, it only has around 4 per cent of the higher-yielding business market. 2degrees has spun that as a “lots of room for growth story in its IPI presentation”. But being able to cross-sell to Vocus’s broadband base, and tap into Vocus’s enterprise customers, would help.

Vodafone and Spark will also be eyeing Vocus’s fibre network. And while still CEO of Spark, during 2018 when Vocus Group but its NZ arm up for sale (before withdrawing it), Simon Moutter said he would like to acquire Vocus NZ’s 200,000 or so broadband customers – the better to convert a good chunk of them to fixed-wireless.

Moutter qualified, however, that it was probably not worth a bit, because of regulatory challenges.

He was probably right. Meade says it’s unlikely the ComCom would be open to Spark or Vodafone NZ making a rival bid for Vocus NZ (or 2degrees) would have little chance of getting past the regulator.

$2.3b company

If a 2degrees-Vocus NZ merger did gain approval, it would create a company that was worth around $2.3 billion – combining Vocus’ strength in broadband and business with 2degrees’ consumer mobile base to form a stronger number three competitor to Vodafone NZ and Spark.

A spokesperson for 2degrees said: “All I can share is that our IPO has been paused. It’s a matter for our shareholders.”

2degrees’ majority shareholder, the Seattle-based, Toronto-listed Trilogy, had no comment. A spokesperson for Voyage Australia – which bought Vocus NZ parent Vocus Group in July – said: “At this time, we decline to comment.”

Any takeover or merger deal would mean the end of 2degrees’ proposed IPO as well.

Crossed paths before

Vocus and 2degrees’ paths are said to have crossed before.

In late 2017, Vocus Group put its NZ operation up for sale. The two final bidders were said to be Trustpower, plus 2degrees in concert with a private equity sale. But new Vocus Group management pulled the NZ business off the table in 2018, amid talk that neither Trustpower nor 2degrees were willing to meet an asking price of around A$500 million.

In no-deal roadshows with investors on both sides of the Tasman, neither company has confirmed NZX or dual ASX/NZX plans – but with Vocus NZ expected to list at a market cap of around $800m, and 2degrees around $1.5 billion, the apparent scrapping of the pair’s plans represents a lot of lost potential business for the local bourse.

If both IPOs do evaporate, it won’t be the first time the NZX has missed out on a telco listing.

In 2019, Vodafone’s NZ business initiated a major restructure ahead of a proposed NZX listing – only for it to be headed off at the last moment by a $3.5b trade sale to Infratil and Brookfield Asset Management.

And earlier this year, then ASX-listed Vocus Group hired managers for a proposed spin-off and NZX listing of its New Zealand business.

But that proposed IPO was scuttled when Vocus Group was bought by Voyage Australia – a joint venture between Macquarie Group subsidy Mira and Aware Super.

After closing the deal in July, Voyage reanimated plans to spin out Vocus’s NZ business, hiring Goldman Sachs, Forsyth Barr and UBS to manage a possible float.

A non-deal roadshow kicked off in the last week of September.

Leaked presentations, which a Vocus insider did not dispute, said Vocus NZ would list at a value of between $598m and $783m – or between 8x and 11x ebitda. (Spark is currently trading around 9x operating earnings and the wholesale-focused Chorus at around 6x.)

An investor deck included a plan to rebrand as Orcon Group if the listing went ahead.

2degrees’ plans have also been quite advanced.

Trilogy announced plans to explore an IPO or trade sale for 2degrees earlier this year.

Jarden, Macquarie and Craigs were subsequently hired to run a non-deal roadshow.

In July, 2degrees named ex-Port of Tauranga chief Mark Cairns as its chairman-in-waiting should its IPO go ahead. Last week it revealed the makeup of its whole board – which included Trilogy founder John Stanton, the US billionaire who also sits on the global boards of Microsoft and Costco.

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