18 June, 2019
This article is part of the June 2019 edition of our competition newsletter, focusing on some recent key competition developments.
Following an 8 month investigation, on 8 May 2019, the Australian Competition and Consumer Commission ("ACCC") announced its decision to oppose the proposed merger between fixed-line provider TPG Telecom ("TPG") and mobile network operator Vodafone Hutchinson Pty Limited ("VHA").
VHA and TPG have announced that they intend to challenge the ACCC's decision, and apply for a declaration from the Federal Court that the proposed merger is not likely to substantially lessen competition.
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Background
TPG provides telecommunications services including retail fixed broadband services, retail mobile services (as a mobile virtual network operator ("MVNO")) and wholesale services, through its key brands TPG, iiNet and Internode. VHA is the third largest telecommunications provider in Australia and owns and operates its own 3G and 4G mobile network. It also supplies wholesale mobile services (including to TPG) and in December 2017 commenced supply of retail fixed broadband services.
Australia's mobile services market has three mobile network operators ("MNOs") Telstra, Optus and VHA, together holding over 87% share. The fixed broadband market is also concentrated with Telstra, TPG and Optus having approximately 85% share.
In a Statement of Issues released in December 2018, the ACCC identified four key markets in which it considered there to be competition concerns.
- Retail Mobile Market ("Red light" concerns): The ACCC expressed concerns that the merger would remove TPG as an aggressive competitor in the supply of these services, who would likely (absent the merger) offer cheap plans with large data allowances.
- Wholesale Mobile Market ("Amber light" concerns): The ACCC considered the merger would remove TPG as a potential fourth MNO, which may result in higher prices for wholesale services and more restrictive conditions for wholesale customers (ie other MVNOs) that supply retail mobile services and plans to end-user consumers. In 2017, TPG had announced plans to become an MNO and commenced building its own mobile network. It also successfully bid for 2 x 10 MHz of 700 Mhz spectrum (4G), at $1.26 billion.
- Retail Fixed Broadband Market ("Amber light" concerns): The ACCC expressed a concern that the merger would remove VHA as a future, potentially significant competitor for supply of retail fixed broadband services. The ACCC considered that VHA would be better placed than others to overcome the high barriers to expansion given its substantial customer base, high level of brand recognition, and established operations.
- Retail Home Broadband Services (5G) ("Amber light" concerns): The ACCC considered whether when 5G technology becomes commercially available in the near future, TPG and VHA may, in the absence of the merger, compete in a market for retail broadband services using either mobile or fixed networks. 5G is the next generation of mobile technology (expected to launch globally in 2020), delivering speeds that match or exceed existing fibre broadband services.
Decision
In a media release dated 8 May 2019 (issued one day ahead of the proposed announcement date, due to a computer system glitch), the ACCC announced that it had opposed the proposed merger.
The ACCC found that the proposed merger would be likely to substantially lessen competition in the market for the supply of (retail and wholesale) mobile services because it would preclude TPG entering as a fourth MNO in Australia. The ACCC concluded that, without the proposed merger, "there is a real chance TPG will roll out a mobile network". This was despite TPG's public announcement in January 2019 that it would cease the rollout of its mobile network.
We expect the ACCC will have received many submissions from interested parties, and issued compulsory notices to produce information and documents to TPG and others to test its counterfactual – specifically, TPG's plans to continue to roll out its mobile network if the proposed merger did not proceed. Such documents and information would have been produced to the ACCC on a confidential basis, and we would not expect the ACCC to refer to them publicly. Nevertheless, it seems, based on the ACCC's media release, that the ACCC's finding regarding the counterfactual is based on inferences about TPG's capability (based on its past track record as an aggressive disruptor) and commercial incentives, rather than direct evidence.
It's worth noting that, following the ACCC v Metcash Trading Limited Federal Court cases in 2010/2011, the standard of proof to be applied in merger analysis remains unsettled – specifically, whether, for the ACCC to successfully block a merger, it must establish that there is a "real chance" or (the higher burden of) "more probable than not" that:
- a counterfactual will come to pass if the proposed acquisition does not proceed; and
- the proposed acquisition would result in a substantial lessening of competition compared to the counterfactual.
Regulatory activism in a concentrated sector
While some may not be surprised by the ACCC's decision to oppose a 4 to 3 merger in a concentrated sector, it is unusual for a competition regulator to block a merger on the basis that it does not accept the acquirer's publicly announced position about its future intentions. The ACCC's decision has been criticised by some as displaying the "nirvana fallacy" – an idealised, unrealistic regulatory counterfactual (by comparison with which the factual will inevitably produce a substantial lessening of competition).
If the parties proceed with their intentions to challenge the ACCC's decision, it will be interesting to see whether the ACCC will be able to satisfy the Court that (whether the "real chance" standard or "balance of probabilities" standard is applied):
- TPG would and could, in the absence of the merger, progress the roll-out of a fourth mobile network in Australia and emerge as a strong competitive force against incumbent players; and
- competition would be substantially lessened by the merger, in circumstances where it seems plausible that the merged entity would be more effective at constraining incumbent players Telstra (which reportedly has 50% of the mobile market) and Optus.
Overall, the decision demonstrates the tougher line that the ACCC has been taking in its assessment of mergers. ACCC Chairman, Rod Sims, has been vocal about his concerns that the hurdle for establishing that a proposed merger is anti-competitive is too high, and should be revisited. The ACCC may yet fail to satisfy that standard in the pending TPG / VHA litigation.
With thanks to Adelle Elhosni and Roanize Kruger of Ashurst for their contribution.
For further information, please contact:
Peter Armitage, Partner, Ashurst
peter.armitage@ashurst.com
