# Vodafone Group Plc announces VHA and TPG Telecom Limited merger

- Link: https://www.directorstalkinterviews.com/vodafone-group-plc-announces-vha-and-tpg-telecom-limited-merger/412757428
- Published: 2018-08-30T07:29:52+01:00
- Author: Giles Arbor

**[Vodafone Group Plc](https://www.directorstalkinterviews.com/ftse-company/vodafone-group/vod.l)**(
[LON:VOD](https://www.directorstalkinterviews.com/ftse-company/vodafone-group/vod.l))
announced today that Vodafone Hutchison Australia Pty Limited and TPG Telecom Limited
have agreed a merger to establish a new fully integrated telecommunications operator
in Australia.

The merger brings together leading talent in Australia’s mobile and fixed broadband
sectors and accelerates the benefits of the substantial network investments made
by both companies. The merged company will be a more powerful challenger to Telstra
and Optus in Australia, with an integrated fixed and mobile offering. It will also
be better able to invest in next generation mobile and fixed networks and drive 
innovation, service and product improvements to benefit Australian telecoms customers.

Vodafone and Hutchison Telecommunications (Australia) Limited will each own an economic
interest of 25.05% in MergeCo, with TPG shareholders owning the remaining 49.9%.
The Board of MergeCo will comprise: David Teoh, as Chairman (currently CEO and Chairman
of TPG), Iñaki Berroeta as Managing Director and CEO (current CEO of VHA), existing
TPG directors Robert Millner and Shane Teoh, two nominees of Vodafone, two nominees
of HTAL, and two new independent directors. MergeCo will be listed on the Australian
Securities Exchange (ASX) and called TPG Telecom Limited. There are no changes currently
planned to any of the existing brands of either VHA or TPG.

The merger is expected to generate substantial cost synergies from the combination
of two complementary networks, rationalisation of duplicated costs and economies
of scale. Additionally, the combined entity will benefit from revenue synergies 
through cross-selling of products across both VHA and TPG’s corporate and consumer
customer bases.

The agreed merger ratio implies an enterprise value for VHA of A$7.5 billion. This
is equivalent to valuing VHA at 7.4x EV/LTM June 2018 EBITDA and 19.2x EV/LTM June
2018 operating free cash flow (OpFCF). MergeCo will have a pro forma enterprise 
value of approximately A$15.0 billion, revenue of over A$6.0 billion, EBITDA of 
over A$1.8 billion and OpFCF of A$0.9 billion. Approximately A$2.0 billion of VHA’s
existing debt will be contributed to MergeCo, which will have pro-forma leverage
of approximately 2.2x net debt/EBITDA[i] and an expected strong investment grade
credit profile. The strong cash generation of the combined entity is expected to
support an attractive dividend. It is intended that MergeCo will pay a dividend 
of at least 50% of net profit after tax adjusted for one-off restructuring costs
and certain non-cash items (“Adjusted NPAT”)[ii] and have a medium-term target leverage
range of 1.5-2.0x net debt/EBITDA. Vodafone’s interest in MergeCo will be accounted
for under the equity method.

Vodafone and HTAL’s shareholdings in MergeCo, and the remaining VHA net debt of 
approximately A$4.8 billion that will not be contributed into the merged company,
will primarily be held through an entity jointly owned by the Vodafone Group and
HTAL. Debt held through this entity will be serviced by dividends from MergeCo, 
and will not be consolidated by Vodafone or HTAL. Vodafone will provide a guarantee
on approximately A$2.4bn of this debt, lower than the approximately A$3.3 billion
guarantee that Vodafone currently provides for VHA’s debt.

Vodafone, HTAL and David Teoh have entered into a 24 month standstill arrangement
in relation to their shareholdings in the combined business.[iii]

> **Nick Read, CEO-designate, Vodafone Group Plc, said:** “This transaction accelerates
> Vodafone’s converged communications strategy in Australia and is consistent with
> our proactive approach to enhance the value of our portfolio of businesses. The
> combined listed company will be a more capable challenger to Telstra and Optus,
> and will be much better placed to invest in next generation mobile and fixed line
> services to benefit Australian consumers and businesses.”

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 licenses and/or facilitate various forms of efficient spectrum and
network sharing including a shared 5G Radio Access Network. The Joint Venture Agreement
is ongoing, and will not terminate if the merger fails to proceed.

It is anticipated that the merger will complete in 2019, subject to approval from
TPG shareholders and regulatory authorities.

[i] Leverage includes $1,944 million of VHA’s net debt and $1,672 million of TPG’s
net debt at closing and 700 MHz spectrum payments of A$80m and A$352m due in January
2019, respectively. Leverage does not include the 700 MHz spectrum payments due 
in January 2020 of A$80m and A$352m for VHA and TPG respectively, nor any working
capital adjustments that may be required.

[ii] Adjustments of one-off restructuring costs and certain material non-cash items
in order to ensure that the Adjusted NPAT is more closely aligned to the cash generation
of MergeCo.

[iii] Vodafone has agreed to a 24 month escrow period in relation to its entire 
shareholding in MergeCo, commencing from implementation of the Scheme, during which
period Vodafone cannot sell its shares in MergeCo. TPG Chairman David Teoh has also
agreed to a 24 month escrow in MergeCo following implementation of the Scheme.

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