Will 2degrees-Orcon merger pass Commerce Commission test?

Competition law experts say the proposed 2degrees-Orcon Group merger should sail past the Commerce Commission.

The merger of the two firms will create a company worth some $1.7 billion – and a firm third in the market behind Spark and Vodafone.

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The pair’s merger talks were first revealed by the Herald on October 5. The two companies confirmed the story on October 7, but it was not until midway through the evening of New Year’s Eve that they announced a deal had been reached.

A merger application was formally submitted to the Commerce Commission on January 4 and has now been made public by the regulator.

Spark and Vodafone have yet to say if they will challenge the merger, or make submissions on any aspect of the deal. A spokesman for Vodafone said the company was still assessing the application.

The Commerce Commission is due to rule on the merger in March.

There is an underlying question behind whether the combined 2degrees and Orcon Group will pass the key Commerce Act test. That is: Will the deal lessen market competition?

The application notes that Orcon Group (the trading name for Vocus NZ) has no mobile network, while 2degrees has no fixed-line network. Together, they will be able to offer consumers better deals across the board.

Experts canvassed by the Herald say that’s a valid take. A combined 2degrees and Orcon will form a more viable number-three competitor to market leaders Spark and Vodafone, which should boost competition.

2degrees has 1.5 million mobile customers but is relatively weak in broadband, where it has around 135,000 customers for its fixed-line internet service (running over Chorus copper and fibre).

Orcon Group (which includes the Orcon, Slingshot and Stuff Fibre brands) is the clear number three in broadband, with around 235,000 customers but a minnow in mobile, where it has no network of its own (its cellular service is based on a wholesale deal with Spark that has garnered just 35,000 subscribers).

The group also owns a nationwide backbone fibre network running to some 4200km and a power retailer with 40,000 customers (which provisions Orcon Power and Slingshot Power). And, behind the scenes, it provisions Sky TV’s new broadband service.

Spark and Vodafone NZ both have around 2.5 million mobile customers.

Spark is the market leader in fixed-broadband, with around 700,000 customers, while Vodafone NZ is the number two with a little over 400,000 (the combined Orcon-2degrees would have 375,000).

Earlier, economist and AUT senior research fellow Richard Meade told the Herald a combined 2degrees and Vocus would increase market competition by serving as a more effective challenger to Spark and Vodafone.

Meade said it was possible the deal would juice competition in the power market, too, if 2degrees’ mobile customers are able to access deals that bundle mobile and electricity service (Orcon Group includes power retailer Switch Utilities in its stable).

Associate Professor Chris Noonan, who lectures in competition and company law at the University of Auckland, also saw little prospect that the Commerce Commission would block a 2degree-Orcon Group deal.

The merger plan follows a deal between their respective corporate parents.

In a December 31 (NZT) market filing, Seattle-based, Toronto-listed Trilogy International Partners said it had reached a deal to sell 2degrees to Voyage Australia – the joint venture formed by Macquarie Group and Aware Super to buy then ASX-listed Vocus Group.

Trilogy said the deal values the combined Orcon-2degrees at $1.7b including lease liabilities, $1.58b excluding lease liabilities or $1.32b on a “cash-free, debt-free basis”.

In early October, the Herald broke the news that Orcon and 2degrees had put their respective NZX listing plans on hold as they entered merger talks.

Asked today if the merged business will list on the NZX, an Orcon Group spokesman said, “There are no plans to IPO”.

He said the leader of the combined companies will be announced: “in due course”.

“This is an incredibly exciting day – both 2degrees and Orcon have a long heritage in the New Zealand market,” Orcon Group CEO Mark Callander said in a statement.

“This transaction marks a step-change in the New Zealand telecommunications landscape and will establish a stronger player in the market. This will lead to more competition and benefits to end-users.

“By bringing together two great Kiwi businesses with complementary assets and a shared challenger mindset, exciting growth opportunities can be realised.”

2degrees chief executive Mark Aue said, “Combining the strengths of our respective businesses and the talents of our people will enable us to continue to innovate, enhance our product and service offering to benefit all Kiwis, and to further grow the new business.”

He added, “While we finalise the details it will remain business as usual for both teams. Our customers will continue to receive the high-quality products, service, and support they are used to, and our people will stay focused on meeting their needs. Over time, the businesses will integrate as the new company looks to offer more services to both new and existing customers.”

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