The recent decision in Vodafone Hutchison Australia Pty Ltd v Australian Competition and Consumer Commission  FCA 117 will allow the proposed merger between Vodafone Hutchison Australia Pty Ltd (Vodafone) and TPG Telecom Limited (TPG) to proceed.
The Court found that the merged entity will be more competitive against its biggest rivals (Telstra and Optus) in the retail mobile market than Vodafone or TPG alone.
In late August 2018, Vodafone announced a merger with TPG which was to be conducted by way of a scheme of arrangement.
A condition precedent to the Scheme Implementation Deed was obtaining informal merger clearance from the Australian Competition and Consumer Commission (ACCC). The ACCC conducted a public review of the merger and refused to provide informal merger clearance as it was of the view the merger was likely to substantially lessen competition in the market, (being the Australian retail mobile market), in contravention of section 50 of the Competition and Consumer Act (CCA).
Vodafone applied to the Federal Court to seek a declaration that the proposed merger was not likely to substantially lessen competition in the market.
On 13 February 2020 the Federal Court granted the declaration sought by Vodafone.
The CCA sets out a non-exhaustive list of factors that a Court must be consider in deciding whether a merger will substantially lessen competition in a market. These factors include whether the merger would result in the removal from the market of a ‘vigorous and effective’ competitor or would affect the number of players in the market.
The ACCC argued that the merger would substantially lessen competition as there was a real chance that absent the merger, TPG would roll-out a mobile network and be the fourth mobile network operator in Australia.
The Court ruling
Justice Middleton found that there was no commercially relevant or meaningful chance that TPG would roll-out a retail mobile network or become a competitive fourth mobile network operator in the future (being the next 5 years).
The Court accepted evidence produced by TPG which showed that TPG had lost all will and incentive to enter the market. This was the result of the Security Guidance imposed by the Commonwealth Government which essentially banned the use of Huawei equipment from the 5G network. This meant that TPG’s upgrade path to 5G is blocked as it had been using Huawei equipment in its roll out.
The Court also stated “it is not necessarily the number of competitors in the relevant market, but the quality of competition that is relevant”. The Court found that the merged entity would be more competitive and that the merger was a “rational and business-like solution” to combat the competitive strength of Telstra and Optus and would create efficiencies, leading to a better outcome for Australian consumers.
Justice Middleton further commented that if the merger did not proceed, TPG would need to monetise its spectrum assets which could lead to a sale or sub-lease of these assets to Telstra. His Honour noted that it is not for the ACCC or the Court to engineer a competitive outcome. The only question is whether the merger would have the effect, or be likely to the have the effect, of substantially lessening the competition in the supply of retail mobile services in Australia.
What does this mean for the market
Completion of the merger is expected to occur mid-year, subject to satisfaction of other conditions such as FIRB, TPG shareholder and Court approval.
ACCC stated that it would not appeal the decision and the timeframe to appeal the decision has lasped. However, the ACCC has said that it will continue to oppose mergers that it believes substantially lessens competition.
The ACCC's Chairman, Rod Sims expressed concern that the hurdle for establishing that a proposed merger is anti-competitive is too high and should be revisited.
The ACCC has indicated that it will continue to advocate for changes to merger laws, including a "rebuttable presumption" that where a merger is likely to result in a significant increase in concentration in a market, the merger should be prevented from proceeding absent evidence to the contrary (similar to the position in the US).
The Government has already committed to undertake further consultation on the ACCC's recommendation.
This article provides general comments only. It does not purport to be legal advice. Before acting on the basis of any material contained in this article, we recommend that you seek professional advice.
Maggie Wong, Senior Associate in our Transactions Team
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