Vodafone Hutchison Australia, TPG Telecom confirm merger plans

  • TPG Telecom Limited and Vodafone Hutchison Australia announce a merger of equals transaction to establish Australia’s leading challenger full-service telecommunications provider
  • TPG shareholders will own 49.9% of the new merged group with VHA shareholders owning the remaining 50.1%
  • Merger will provide scale and financial strength to compete more effectively with Telstra and Optus, and be better able to invest and drive innovation, service and product improvement to benefit Australian telecommunications customers
  • Combines two highly complementary businesses to create a leading integrated, full-service telecommunications company with a comprehensive portfolio of fixed and mobile products for consumers, SMEs and enterprises
  • Pro forma enterprise value of approximately $15.0bn1, revenue of over $6.0bn, EBITDA of over $1.8bn, Operating Free Cash Flow of $0.9bn,2 and a strong balance sheet with an investment grade credit profile and strong cash flow generation which is expected to support an attractive dividend
  • Merger of equals brings together leading talent in the mobile and fixed broadband sectors and accelerates the benefits of substantial network investments from both companies
  • The Merger is expected to deliver substantial cost synergies from the combination of complementary networks, rationalisation of duplicated costs and economies of scale. Additionally, both parties recognise the potential for revenue synergies from the opportunity to cross-sell products across both TPG’s and VHA’s combined corporate and consumer customer bases
  • The Merger is unanimously recommended by the Board of TPG

TPG Telecom Limited (“TPG”) and Vodafone Hutchison Australia Pty Ltd (“VHA”) are pleased to announce that the companies have entered into a Scheme Implementation Deed (“SID”) under which the companies have agreed a proposed merger of equals to establish a fully integrated telecommunications operator in Australia (“Merger”). The Merger will create a more effective challenger to Telstra and Optus, with an integrated fixed and mobile offering and a pro forma enterprise value of approximately $15.0bn.1
TPG is an ASX listed Australian telecommunications provider with Australia’s second largest fixed line residential subscriber base of over 1.9 million subscribers and a significant corporate, government and wholesale business.

VHA is Australia’s third largest mobile operator which is owned 50/50 by ultimate parent entities Vodafone Group Plc (“Vodafone”) and Hutchison Telecommunications (Australia) Limited (“HTAL”) and has a mobile customer base of approximately 6.0 million subscribers as of June 2018.

The companies own and operate highly complementary telecommunications network infrastructure, including 27,000km+ metropolitan and inter-capital fibre networks, a leading mobile network with over 5,000 sites, international transit capacity and a strategic portfolio of spectrum assets. The combination of these assets will maximise the opportunities presented by convergence and best position the combined company to invest in 5G technologies that will deliver faster services and offer more competitive value propositions to more Australian customers. There are no changes currently planned to any of the existing brands of either TPG or VHA.

Transaction details

The Merger will be implemented via a TPG Scheme of Arrangement (“Scheme”), with the new merged group listed on the Australian Securities Exchange (“ASX”) and renamed “TPG Telecom Limited” (“Merged Group”) in conjunction with implementation of the Scheme.

Following completion of the Merger, TPG shareholders will own 49.9% of the equity of the Merged Group, with VHA shareholders owning the remaining 50.1%.
Upon implementation, the Merged Group will have pro forma leverage of approximately 2.2x net debt/EBITDA,3 targeting a strong investment grade credit profile. The strong cash flow generation of the combined entity is expected to support an attractive dividend. The combined entity intends to have an initial dividend payout ratio of at least 50% of NPAT adjusted for one-off restructuring costs and certain non-cash items4 and a medium- term target leverage range of 1.5 – 2.0x net debt/EBITDA.
VHA is expected to have net debt of approximately $1,944m (plus an $80m spectrum instalment on 31 January 2019) following a restructure of VHA’s existing debt facilities by its shareholders concurrently with the implementation of the Merger.

TPG is expected to contribute net debt of approximately $1,672m (plus a $352m spectrum instalment on 31 January 2019). To the extent that TPG’s actual net debt balance is below $1,672m at the time key conditions precedent to the transaction have been satisfied or waived, TPG may declare a fully franked cash special dividend for the benefit of the current TPG shareholders prior to implementation.

The parties expect to achieve substantial cost synergies from the combination of their complementary networks, rationalisation of duplicated costs and economies of scale. Additionally, both parties recognise the potential for revenue synergies from the opportunity to cross-sell products across both TPG’s and VHA’s combined corporate and consumer customer bases.

Major shareholders of both TPG and VHA remain committed to the long term value creation opportunities available to the combined group, and will enter into separate 24 month voluntary escrow arrangements on this basis.

Additional details on the Scheme, consideration and timetable will be included in the Scheme Booklet that will be sent to shareholders in due course.

Joint Venture and 5G Spectrum Auction

In parallel to the merger agreement, TPG and VHA have signed a separate Joint Venture Agreement. The scope of the joint venture is to acquire, hold and licence 3.6 GHz spectrum. The Government is auctioning 125 MHz of 3.6 GHz band spectrum, with the auction expected to commence in late November 2018. The joint venture will register as a participant in the auction. In addition, the parties will negotiate with the aim of expanding the business of the joint venture in future, including to acquire future spectrum licences and/or facilitate various forms of efficient spectrum and network sharing including a shared 5G RAN. The Joint Venture Agreement is ongoing, and will not terminate if the merger fails to proceed.

Note: this article is an excerpt of the original ASX Scheme Implementation Deed. Please read the document attached in full below.

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