Vodafone buys TelstraClear: the shape of Telecom's new competition

UPDATE Oct 30: Vodafone has completed its $840 million purchase of TelstraClear following Commerce Commission clearance yesterday.

“We can now start bringing the businesses together and releasing the potential for our customers. Our combined strength in both mobile and broadband means we can help our customers do their thing better – whether that’s mobile services, broadband, pay TV or sophisticated ICT services across New Zealand," CEO Russell Stanners said in a statement.

“Vodafone and TelstraClear are now one business, operating as separate business units, with a strong focus on continuing to deliver a great experience to Vodafone and TelstraClear customers.”

Yesterday, Vodafone said TelstraClear would operate independently for an assessment period of five to six months. The TelstraClear brand would be eliminated within 18 months.

Meanwhile, Telecom has launched an aggressive print-only campaign targeting TelstraClear customers.

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THE SHAPE OF THINGS TO COME

Leadership
Vodafone NZ CEO Russell Stanners would lead the combined company. UPDATE 3.30pm: As expected, TelstraClear chief executive has announced his resignation, pending the completion of the sale of TelstraClear to Vodafone (which Vodafone says will be completed tomorrow. Dr Freeth became CEO in 2005. His last day will be November 1.

The CEO of the larger telco was always going to take charge. But it was noteable Mr Stanners and Dr Freeth had different world views on a number of issues including outsourcing (the TelstraClear boss oversaw the offshoring of call centre jobs to Manila, Vodafone NZ last year relocated them back to NZ) and Sky TV (where Dr Freeth said wholesale agreements with the pay TV broadcaster had reached a pain point, but Mr Stanners told NBR he saw no issue with restrictive terms).
 

Branding
Vodafone has said it will phase out TelstraClear branding over 18-months after the deal is approved.
 

Staff
Vodafone-TelstraClear: 2600 (Vodafone: 1300; TelstraClear 1300)
Telecom:  7619

In its filing for approval, Vodafone flagged there would be layoffs in some backoffice areas where there were double-ups (and, as the disappearing Dr Freeth has shown, management). The two businesses will be run independently for five to six months while an assessment is carried out, Vodafone corporate affairs head Tom Chignell said today.
 

ISP market share
Telecom: 49%
Vodafone-TelstraClear: 29% (TelstraClear today: 16%; Vodafone: 13%)
CallPlus/Slingshot: 9%
Orcon: 5%
Others: 8%

TelstraClear has around 200,000 ISP customers according to Commerce Commission figures and about 270,000 landline customers all up.

In its filling for approval, Vodafone said it would utilise TelstraClear's fibre backhaul, reducing its reliance on NZX-listed Chorus.
 

Mobile market total connections

Vodafone: 2.37 million (47.21%)
Telecom:  1.57 million (31.87%)
2degrees: 1 million (19.92%)
TelstraClear/MVNOs: 50,000 (1%)

TelstraClear Mobile is already a rebadged version of Vodafone's modest in size, with a modest 45,000 customers or so. Vodafone will acquire valuable spectrum, however.
 

Revenue

Vodafone NZ: In the 12 months to March 31, 2012, net profit rose to $175 million from $151.5 million a year ago. Revenue fell 4.3% to $1.62 billion.

TelstraClear: TelstraClear earnings before interest, tax, depreciation and amortisation rose 18%  to $A99 million ($NZ126 million) in the 12 months ended June 30, according to Telstra’s annual results. Sales fell 2.3% to $A502 million (NZ641 million).

Telecom: For the year ending June 30, Telecom posted underlying earnings that rose 9% to $422 million. Full-year earnings before interest, tax, depreciation and amortisation from continuing operations climbed 42% to $1.08 billion. Sales declined 8.6%t to $4.58 billion.

Ultrafast Broadband (UFB)
Mr Stanners has said he sees TelstraClear's hybrid fibre-coaxial (HFC) networks in Wellington and Christchurch as a strong asset, but also that the combined company's future fibre expansion would focus on reselling Ultrafast Broadband (UFB) services rather than expanding or upgrading HFC.

While TelstraClear was in conflict with Sky TV over what CEO Allan Freeth saw as a restrictive partnership agreement, Vodafone's Mr Stanners has told NBR he has no issue with Sky TV's clone set-top box terms, and wholesale content terms.

Vodafone-TelstraClear deal cleared: the shape of Telecom's new rival

Oct 30: The Commerce Commission has approved Vodafone's $840 million takeover of Telstra's fully-owned NZ subsidiary, TelstraClear. The deal has now cleared its final hurdle. The Overseas Investment Office has already cleared Vodafone NZ (which has a UK parent) to talkeover TelstraClear.

Scroll down for market share stats and other data on the combined company.

Vodafone NZ said this morning that it expects to complete the deal tomorrow, October 31. Vodafone and TelstraClear will continue to trade as separate business units initially, CEO Russell Stanners said in a statement.

Mr Stanners has previously told NBR the TelstraClear brand will be phased out within 18 months of the deal being consummated. This morning, a Vodafone spokeswoman confirmed that was still the plan.

Commerce Commission chairman Dr Mark Berry said in a statement, “In reaching its decision, the Commission considered that the merged entity would continue to face competition from Telecom, as well as Orcon, Slingshot and other smaller businesses in providing fixed line voice and broadband services to residential and small business customers”.

"The Commission did not find any significant business overlap between Vodafone and TelstraClear in the provision of either mobile phone services or fixed line services to large businesses.

"Finally, Vodafone would not acquire all of the radio spectrum presently owned by TelstraClear. Some of the spectrum will be transferred to TelstraClear’s parent, Telstra Corporation, and will be available for purchase by other telecommunications companies." Two 15MHz blocks of 1800 MHz spectrum and two 5MHz blcoks of 2100 MHz band spectrum are now Telstra's to sell.

The path to approval was cleared by Vodafone not seeking to acquire all of TelstraClear's spectrum, which falls in the 4G-friendly 1800MHz and 2100MHz bands (in what the Telecommunications Users' Association saw as move to eliminate the most obvious regulatory roadblock).

In its filing, Vodafone proposed a swap and sale arrangement that would see it boost its 1800MHz and 2100MHz spectrum holdings from 2x15MHz blocks to 2x25MHz - more than rivals Telecom and 2degrees across the combind bands. Crucially, the spectrum will be "contiguous" or in a single block. 

 "We have received approvals to purchase everything we applied for," a Vodafone spokeswoman told NBR this morning. The spectrum holding arrangement has been approved by the MBIE (incorporting the old MED).

2degrees, which has agitated for more spectrum to be made available, will be pleased the Telstra-held spectrum will be up for grabs to rivals. The government is also putting 700MHz spectrum freed up by the digital TV switchover up for auction shortly.

Heft to challenge Telecom
Telecommunications Users Association head Paul Brislen agreed with the Commission that there was little overlap between the two companies.

Mr Brislen saw potential upside: "Hopefully the two combined together will have the ability to shake up the market and to challenge Telecom for the number one spot – a long-held goal of Vodafone CEO Russell Stanners," he told NBR.

However, the Tuanz boss was also concerned that "There doesn’t appear to be any form of ongoing monitoring or caveats on the deal."

Green Party co-leader Russel Norman said the deal would reduce competition: "This merger will enhance Vodafone’s ability to compete more broadly with Telecom but it will come at the cost of new entrants like 2degrees."

Vodafone has argued that it the deal will not create a "big two" duopoly. In the world of fibre and IP (internet protocol) telephony, the combined company would face competiton from the likes of Datacom, IBM, HP and ISPs expanding their calling business as Telecom, Mr Stanners says.

Deal seen as good fit
The deal is seen making sense given Vodafone is strong in mobile, but has less access to the corporate market where TelstraClear is strong.

Under the terms of the deal, Vodafone will service the New Zealand side of Telstra's trans-Tasman client corporate business (such as its contract with NAB-owned BNZ). TelstraClear will also deliver Vodafone its substantial public sector business, which includes major contracts with ACC, Defence, Customs and IRD

Non-compete clause with Telstra
The takeover includes a non-compete cause, of unknown duration, that prevents Telstra entering the NZ market.

Regardless, most analysts dismiss the notion that cash-rich Telstra is clearing the decks for a run at Telecom. Telecom is struggling to turnaround declining profits at a time when Telstra is eyeing high-growth opportunities at home, and in Asia.

"Clearly negative for Telecom"
Earlier, Deutsche Bank's Mr Zame told NBR the proposed deal was "clearly negative for Telecom", which would face a "more effective and integrated competitor at top end of town."

In the landline retail market (see stats below) Telecom will also face its first competitor of serious scale. Mr Zame said it would have the critical mass necessary to seriously challenge Telecom. Beyond around 270,000 landline customers, TelstraClear has unblundled (moved its own broadband gear into) numerous Telecom exchanges, which will allow Vodafone to expand the reach of its so-called Red Network (which runs off unbundled exchanges, releasing reliance on Chorus, or the Telecom where it controls large metro exchanges).

Forsyth Barr has told clients it will be 12 months or more before Vodafone and TelstraClear are fully integrated.

In its filing for approval, Vodafone flagged that it would utilise TelstraClear's fibre backhaul and other infrastructure, reducing its reliance on Chorus.

The Commission says it will make full details of its decision available shortly.

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