Legal Insights

Australian Federal Court declares that the proposed Vodafone/TPG merger is not likely to substantially lessen competition

By Elise Ball, Christopher Marsh

• 17 February 2020 • 6 min read

With the Federal Court handing down its summary decision yesterday in Vodafone’s appeal against the ACCC’s decision not to provide informal clearance for the merger between Vodafone and TPG, we discuss how the Federal Court of Australia views the market for 5G telecommunications services in Australia.

What's the practical effect of the decision?

In today’s judgment, the Australian Federal Court gives its response to these key questions:

  • Can the Australian market for mobile telecommunications services sustain more than three mobile network operators (with their own network infrastructure)?
  • Which option delivers better competitive outcomes in the telecommunications sector in Australia:
    • a standalone new entrant in mobile telecommunications who will fuel competition in 5G mobile and fixed wireless services? or
    • a merged fixed and mobile operator who may ultimately emerge as a better constraint on Telstra and nbn Co (in fixed telecommunications) and Telstra and Optus (in mobile telecommunications)?

The Federal Court accepted that TPG has no business case for rolling out a 5G network of its own, referring to the decision of the TPG board on 29 March 2019 that building a mobile network was not an option for TPG. Accepting this evidence meant that, even without the merger, there was no likelihood of any fourth mobile network entrant, and the Court found that in these circumstances “the rational and business-like solution is for Vodafone and TPG to merge, with the result that both companies will be enhanced and will be a stronger competitive force against Telstra and Optus”. The Court also stated that “it is not for the ACCC or this Court to engineer a competitive outcome.”

The Federal Court found that a standalone new entrant in mobile telecommunications was not a possibility and therefore the merger, would not stifle future competition in mobile telecommunications in Australia. Notably the summary judgment does not appear to consider any impact on the fixed telecommunications segment.

The summary judgment also does not directly refer to the impact of the Telecommunications Sector Security Reforms legislation on TPG’s decisions not to invest in network building. That legislation has the effect of limiting the number of viable suppliers of 5G network equipment in Australia, by preventing mobile network operators in Australia from using Huawei and ZTE equipment in 5G networks because of national security concerns.

What's happened? The steps the ACCC took to foster conditions for the entry of a fourth mobile network operator

The seeds for this case were sown right back at the 5G spectrum auctions when the Minister for Communications at the time sought the ACCC’s views on appropriate competition limits in the 3.6GHz spectrum auction. The ACCC’s recommendations to the Minister were made with a clear view to maximising opportunities for a fourth mobile entrant to succeed so that competition in the supply of 5G services could thrive.

The market responded in a way that the ACCC had not anticipated when Vodafone and TPG announced that they intended to participate in the auction using a special purpose joint venture and (separately) also signalling their intention to eventually complete a full merger of the two companies, subject to receiving informal merger clearance from the ACCC.

In advance of considering the informal application for a full merger of the companies, the ACCC formed the view that the two operators bidding as a JV in the spectrum auction would not kill the opportunity for a fourth mobile entrant. However, ahead of the spectrum auction, the ACCC secured undertakings from Vodafone and TPG that they would not take further steps to implement the JV or any merger of the companies ahead of the completion by the ACCC of its informal assessment of the full merger, including by combining spectrum or network assets, or deploying any shared 5G network (including radio access network equipment). The ACCC made its view clear in statements to a Senate Select Committee, that the competition analysis of a special vehicle JV in which the parties may hold spectrum jointly was distinctly different from the competition analysis that would apply to a full merger proposal, as the ACCC still considered that under the JV approach Vodafone and TPG would continue to compete separately for mobile customers.

In its consideration of Vodafone/TPG application for informal merger clearance of a complete merger of the two companies, the ACCC’s key concerns were that if the merger were to proceed, then:

  • in the national market for wholesale mobile services, the removal of TPG as a fourth mobile network operator might result in higher prices for wholesale services and more restrictive conditions on wholesale customers, than would be the case if the merger did not occur
  • in the national market for supply of retail fixed broadband services, the removal of Vodafone as a potentially significant competitor might result in higher prices for retail fixed broadband services and lower quality services (lower data inclusions and or poorer service performance), than would be the case if the merger did not occur.

The ACCC refused to clear the merger (by providing an undertaking to not oppose the merger), primarily on the basis of its concerns about the potential effect the merger would have on competition in the national mobile market. As the parties had not pursued formal merger clearance, there was no avenue of appeal from the ACCC decision – one of the well-known risks of the informal clearance process. Given they wanted to proceed with the merger, TPG and Vodafone were instead forced to apply to the Federal Court for a declaration that if the merger proceeds, they would not be in breach of the prohibition against competitive mergers that “would have the effect, or be likely to have the effect, of substantially lessening competition in a market”.

Seeking a declaration from the Federal Court involved a trial of all the issues, and meant that many telecommunications market participants were required to commit resources to the proceedings, providing witnesses to assist the Federal Court analyse what the likely outcomes in the industry would be, with and without the merger. All of this at a time when 5G rollout plans should have been progressing at pace, if they hadn’t also been stifled by another internationally significant factor, the debate about whether embedding equipment supplied by the likes of Huawei and ZTE in a country’s 5G infrastructure posed an unacceptable risk to national security.

What's next?

Firstly, the ACCC is likely to be deciding whether the Federal Court decision warrants appeal.

If there is no appeal, we understand that the merger transaction still requires approval by the Foreign Investment Review Board, and if approved, Vodafone will have clearance to complete the share acquisition. At that point the industry will be waiting to see whether Vodafone's 5G network and combined fixed and mobile offering drives benefits for consumers of telecommunications services. We also speculate whether the outcome in this case will lead the ACCC to recommend or the ACMA to consider imposing roll-out obligations or "use it or lose it" spectrum license conditions in future spectrum allocation processes.

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