• Commercial spend tightening and digital transformation on agenda.

VHA gets into efficiency mode ahead of TPG merger

VHA gets into efficiency mode ahead of TPG merger

Source: TPG Telecom

Cost cutting will remain a key focus of Vodafone Hutchison Australia (VHA) throughout 2020, despite the pending boost of its merger with rival-cum-partner TPG Telecom, according to Vodafone’s Hong Kong‑based co‑parent CK Hutchison (Vodafonewatch, #183).

The latest Annual Financial Report published by Hutchison Telecommunications (Australia) Limited (HTAL), the vehicle through which Hutchison holds a 50% share in VHA, noted continued “intense competition” in the Australian telecoms market. In light of this, VHA will “continue its focus on reducing costs to manage its financial performance”, HTAL added.

The year in question, to 31 December 2019 (FY19), saw VHA focus on savings but fail to do enough to put itself in the black. Revenue fell 2.8%, to AU $3.52bn (£1.76bn/€1.94bn), reflecting declines in both customer spending (VHA’s mobile average revenue per user dropped 4.9%) and subscriber volume (which was down 4.6%, to 5.74 million, reversing a trend of revived growth over recent years — Vodafonewatch, passim).

Core earnings were up 6.9%, to AU $1.18bn — aided by the efficiency measures. However, projected from HTAL’s ‘share’ of VHA’s results, the joint venture (JV) posted a significantly widened net loss of AU $318.2m for FY19, with increased depreciation and amortisation, “lower commission capitalisation”, and financial expenses blamed for the shortfall.

Debt, discounts, and digital

HTAL did not go into detail on VHA’s near-term savings plans but the Report did reference some areas with probable tie‑in.

  • The Report named interest costs as one of the drivers of VHA’s widened net loss for FY19, but no figures were provided to quantify that impact. At the same time, it confirmed a restructuring of VHA’s debt facilities is being prepared for initiation alongside the TPG merger, apparently supported by Vodafone. HTAL said the borrowing rejig remained subject to the TPG deal being wrapped up — but at the same time, is “expected to complete concurrently with the implementation of the merger”. The merger still needs TPG and VHA shareholder approval (a formality), as well as a thumbs‑up from the Australian Foreign Investment Review Board, but is now widely expected to go through by mid‑2020, following the two operators’ recent court win against the Australian Competition & Consumer Commission (Vodafonewatch, #183). According to documents published when the merger was first announced in 2018, TPG–VHA will have debt of around AU $4bn on completion. Of this, VHA will contribute around half, but this will follow on from a “recapitalisation by the current VHA shareholders” — i.e. Hutchison and Vodafone. The new JV is billed as set to start life with an “investment grade credit profile with strong cash flow generation, which is anticipated to support an attractive dividend”.
  • In light of the recent “uncertainty” surrounding the merger approval process, VHA flagged a row‑back in commercial aggression in FY19, reflected in the mobile user base drop. It also indicated it was likely to maintain this caution during FY20 too (although the TPG merger is sure, ultimately, to bring about a refreshed go‑to-market approach, fuelled by converged services). In a separate statement to report its results, VHA Acting Chief Financial Officer Sean Crowley said the operator had recently made a “strategic decision to focus on maintaining our postpaid mobile base rather than pursuing aggressive customer growth”. He also highlighted “careful management of our operating expenses” as a priority.
  • HTAL’s report made reference to a “digital transformation strategy” at VHA, tied in with the appointment of a new Chief Information Officer in September 2019 (former Qantas Chief Technology Officer Rob James — Vodafonewatch, #178). The appointment seems to have been accompanied by partitioning of VHA’s IT and Network teams — not a closer meld, as some telcos have enacted with the move to Infrastructure Cloud-type service provision. HTAL said James would focus “exclusively on ITstrategy and key projects”. With the move, the JV may be particularly conscious of the potential for post-merger integration work to overwhelm teams internally, and keen for clear delineation, following the high‑profile infrastructure problems that accompanied its creation in the late‑2000s. It could also suggest James’ main focus, for transformation, is away from the network infrastructure realm and in areas such as customer experience (CX) improvement and back office reshaping.
  • An area not mentioned in the Report was tower management — but is likely to be on VHA’s radar as a way to create efficiencies, especially considering reshaping taking place elsewhere in the Vodafone footprint.

The next phase

Beyond the focus areas mentioned above, VHA and TPG have previously set out hopes to create “significant” synergies from their merger, encompassing:

  • Vertical integration of “highly complementary infrastructure assets”, melding TPG’s much larger metro and inter‑city fibre network, plus international capacity, with VHA’s stronger spectrum portfolio and mobile infrastructure. Some integration will have already taken place in this area, following a deal in 2015 that enabled VHA to piggyback on TPG transmission assets, and the two operators’ creation of a spectrum-buying JV alongside the merger announcement in 2018 (Vodafonewatch, #137 and #171).
  • Development of an omni-channel CX strategy, “leveraging VHA’s retail storefront network”.
  • Cross-selling opportunities in the consumer and enterprise markets.
  • De‑duplication in areas including “back office and corporate services”.
  • Scaling‑up of procurement.