Vodafone and Hutchison combine businesses in Australia

Li Ka-shing's Hutchison Telecommunications yesterday announced a deal to combine its operations in Australia with Vodafone to create a $2.7 billion firm.

Hutchison Telecommunication, which operates under the "3" brand in Australia, and Vodafone are combining their Australian businesses in an equal joint venture. The merged entity will have 6 million customers and revenues of A$4 billion ($2.7 billion) for the 12 months ended June 30, 2008.

Hutchison and Vodafone have been on different sides of the table from each other in the past, for example, in 2007 when Hutchison sold its Indian telecommunications business to the UK-based mobile operator, but this is their first joint venture.

Vodafone Australia is a wholly owned subsidiary of the Vodafone Group. It is the number three mobile operator in Australia, after Telstra and Optus, with more than 4.2 million customers. For the fiscal year ended March 31, 2008, it had revenues of A$2.4 billion on which it earned an Ebitda of A$499 million -- translating into an Ebitda margin of 20.5%.

Hutchison Telecommunications Australia is listed on the Australian Securities Exchange. For the 12 months ended June 30, 2008, it had total revenues of A$1.5 billion on which it earned an Ebitda of A$173 million, representing an Ebitda margin of 11.8%.

Hutchison has been struggling to secure a footing in Australia's highly competitive telecommunications market. In March 2007 it raised A$2.85 billion by way of a rights issue of convertible preference shares in order to retire debt and reduce interest costs. At the time, the rights issue was the second largest ever attempted in Australia, following a 2003 offering by ANZ Bank. Hutchison Whampoa underwrote the rights issue and after conversion of the preference shares will own 87% of HTA. Telecom New Zealand owns another 10%.

The surviving brand will be Vodafone, with Hutchison's 3 brand set to be transitioned out over time. The 27% market share of the merged business puts it in a good position to compete with Optus, which currently has a market share of around 31%, and to, eventually, take on Telstra which dominates the market with a 43% market share.

Vodafone will receive a brand fee of 1% of annual service revenues. It will also receive A$500 million in deferred payment from the JV described as the amount "to equalise the value difference between the respective businesses". Vodafone will lend this money to the JV by way of a shareholder loan. The loan is expected to be repaid within 18 months from completion of the deal.

The 10-member board of the combined firm will have equal representation from Vodafone and Hutchison.

Goldman Sachs continued to cement its relationship with Li, advising Hutchison on the deal, while Vodafone was advised by UBS.

The firms have forecast that the net present value of operating expense and capital expenditure synergies will be in excess of A$2 billion, net of integration costs. Specific areas mentioned which are expected to deliver cost savings include procurement, product development, information technology, network, commercial operations and administrative expenses. This has led to concerns that the merger will trigger restructuring and significant job losses.

Hutchison said the deal is accretive to the earnings per share of its Australian business as well as the consolidated Ebit of Hutchison Whampoa's 3 Group.

HTA's share price gained marginally on the ASX to A$0.125. Hutchison Whampoa rose 0.4% to HK$38.40 ($4.95) on the Hong Kong exchange. The Hong Kong conglomerate lost ground last week on a worse-than-expected earnings announcement from Husky Energy, its Canadian oil producing unit.

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