2degrees CEO Mark Aue at his company's new Auckland office, shortly before the Delta outbreak. Photo / Dean Purcell
Late Friday, the respective owners of 2degrees and Vocus NZ (now renamed Orcon Group) finally confirmed the story, first reported by the Herald on Wednesday, that they were in talks about a possible deal. They also confirmed their respective IPOs were on hold.
"Orcon Group" (a potential renaming first reported last month) includes all of Vocus Group's operations on this side of the Tasman including retails ISP brands Orcon, Slingshot, Flip and Stuff Fibre, with their combined 226,000 customers, a wholesale business that provisions broadband for Sky TV, a power retailer with 40,000 customers and a nationwide fibre backbone network.
The Vocus NZ to Orcon Group name change has been registered with the Companies Office.
In their brief comments, both sides included boilerplate statements would not necessarily result in a deal, and that any deal would be subject to regulatory approval.
On the latter score: if a 2degrees-Orcon Group merger is put before the Commerce Commission, would it pass muster?
Experts canvassed by the Herald say it would pass the key Commerce Act test of whether it would "substantially lessen competition".
And that, in fact, it would enhance competition in the telecommunications market by creating a more powerful competitor to number one and two players Spark and Vodafone. And, further, that it could benefit consumers in the power market, too.
2degrees' Toronto-listed majority owner Trilogy International Partners was placed in a trading halt at 8.09am yesterday, pending news.
In its late Friday NZT statement, Trilogy said "the potential merger would bring together 2degrees' and Orcon Group's complementary assets across mobile, broadband and fixed-line services."
"With a shared challenger mindset, 2degrees and Orcon Group would create an integrated fixed-mobile business of scale, providing better service to customers in New Zealand's mobile and fixed telecommunication markets."
2degrees' statement, released at the same time, used the same phrasing.
"2degrees is strong as a mobile operator, but not as strong in broadband. With Vocus, it's the other way around. They're strong on broadband and not very strong at all on mobile," economist and AUT senior research fellow Dr Richard Meade told the Herald.
"So if you bring them together, you're potentially making a more effective competitor for the main players."
Associate Professor Chris Noonan, who lectures in competition and company law at Auckland University, also saw little prospect that the ComCom would attempt to block a 2degree-Orcon Group deal.
"Vertical mergers tend to be less of a problem under the Commerce Act than horizontal mergers. Without the merged entity not having significant market power in either market, a vertical merger is unlikely to be prevented by the Commerce Act," Noonan said.
2degrees is also about to start its 5G upgrade, and Vocus' nationwide fibre backbone network could be a natural complement, the AUT academic says.
"And, interestingly, they might begin to compete with Trustpower and Contact as well. Slingshot and Orcon offer power as well. So if you bundle up 2degrees with them, then you've got something that's starting to look like it's competing with both of the main telco companies, and also some other power companies," Meade adds.
"That suggests we're going in the opposite direction to lessening competition."
Vocus bought power retailer Switch Utilities in 2018, and now bundles power with Orcon and Slingshot broadband. Electricity Authority stats for August 2021 show Vocus has just under 40,000 power customers.
In broadband, Orcon's 226,000 customers between its Orcon, Slingshot and Stuff Fibre brands - that puts it in the number three position behind Spark (just over 700,000) and Vodafone (around 400,000) but ahead of 2degrees (139,000) and Trustpower (112,000).
It also has a wholesale arm provisions Sky TV's new broadband service, behind the scenes, and a nationwide backbone network that runs to some 4200km of fibre.
Vocus has a sub-1 per cent market share in mobile, where it relies on a wholesale deal with Spark.
2degrees has a much chunkier market share in mobile - around 20 per cent by total connections, or around 1.2m mobile connections compared to Spark and Vodafone NZ, which each have around 2.4m.
But more than a decade after its launch, it is still strongest in consumer mobile, and according to market researcher IDC,
2degrees still has only has around 4 per cent of the higher-yielding business market. That was spun that as a "lots of room for growth" story in its IPO marketing roadshow. Being able to cross-sell to Vocus' broadband base, and tap into Vocus' enterprise customers, would help on that front.
Vodafone and Spark will also be eyeing Vocus' fibre network. And while still CEO of Spark, during 2018 when Vocus Group but its NZ arm up for sale (before withdrawing it), Simon Moutter said he would like to acquire Vocus NZ's 200,000 or so broadband customers - the better to convert a good chunk of them to fixed-wireless.
Moutter qualified, however, that it was probably not worth a bit, because of regulatory challenges.
He was probably right. Meade says it's likely the ComCom would block any Spark or Vodafone bid for the company now known as Orcon Group.
If a 2degrees-Orcon Group merger did gain approval, it would create a company that was worth around $2.3b - going by each sides' respective IPO valuations, which matched peers' earning multiples.
That would make it a substantial player, though still some distance behind the dividend-paying Spark, which has a market cap of $8.4b.
In its 2021 annual report, Infratil (market cap: $6.0b) valued its half-share in Vodafone NZ at a relatively modest $857m, down from its 2020 valuation of $974m.
On the wholesale side, Chorus - also dividend stock - is valued at $2.9b.
Vocus Group and 2degrees' paths are said to have crossed before.
In late 2017, Vocus Group put its NZ operation up for sale. The two final bidders were said to be Trustpower, plus 2degrees in concert with a private equity sale. But new Vocus Group management pulled the NZ business off the table in 2018, amid talk that neither Trustpower nor 2degrees were willing to meet an asking price of around A$500 million.
Fast-forward to 2021 and in no-deal roadshows with investors on both sides of the Tasman, neither company confirmed NZX or dual ASX/NZX plans - but leaked presentations indicated Vocus Group expected Orcon to list at a market cap of around $800m, while Trilogy expected 2degrees to be spun off at a value of around $1.5 billion.
If both IPOs do evaporate amid a 2degrees-Orcon Group merger, it won't be the first time the NZX has missed out on a telco listing.
In 2019, Vodafone's NZ business initiated a major restructure ahead of a proposed NZX listing - only for it to be headed off at the last moment by a $3.5b trade sale to Infratil and Brookfield Asset Management.
And earlier this year, then ASX-listed Vocus Group hired managers for a proposed spin-off and NZX listing of its New Zealand business.
But that proposed IPO was scuttled when Vocus Group was bought by Voyage Australia - a joint venture between Macquarie Group subsidy Mira and Aware Super.
After closing the deal in July, Voyage reanimated plans to spin out Vocus's NZ business, hiring Goldman Sachs, Forsyth Barr and UBS to manage a possible float.
A non-deal roadshow kicked off in the last week of September.
Leaked presentations, which a Vocus insider did not dispute, said Vocus NZ would list at a value of between $598m and $783m - or between 8x and 11x ebitda. (Spark is currently trading around 9x operating earnings and the wholesale-focused Chorus at around 6x.)
2degrees' plans had also been quite advanced.
Trilogy announced plans to explore an IPO or trade sale for 2degrees earlier this year.
Jarden, Macquarie and Craigs were subsequently hired to run a non-deal roadshow.
In July, 2degrees named ex-Port of Tauranga chief Mark Cairns as its chairman-in-waiting should its IPO go ahead. Last week it revealed the makeup of its whole board - which included Trilogy founder John Stanton, the US billionaire who also sits on the global boards of Microsoft and Costco.
The best hope for the NZX (and the ASX) will be that the combined 2degrees-Orcon Group reanimates listing plans.
Can the telco navigate through its perfect storm?