Vodafone NZ needs buyer with a head for complexity
Sunday, 12 May 2019
ANALYSIS Vodafone may finally have found a way to cash-up its business in New Zealand.
That follows a statement on Friday by listed infrastructure company Infratil that it and another company – believed to be Canadian investment firm Brookfield – were in discussions to buy the business.
Often, by the time such negotiations come to light a deal is a formality, but there may be no way to tell if that is the case in this instance, given that Vodafone NZ may be a difficult company to price.
THE ROAD TO NEGOTIATIONS
There were rumours that Vodafone mooted selling its New Zealand business as far back as in 2006 shortly after Vodafone repatriated a whopping $500 million dividend from the then super-profitable company.
A sale, then, could have been great timing as it would have come prior to the arrival of competition from 2degrees and regulation that slashed mobile termination fees – which consumer groups claimed had been artificially inflating the cost of calls to and from mobiles.
But if it was on the table, it appears Vodafone missed that window.
Instead, the company doubled-down on New Zealand in 2012 with the purchase of fixed-line and broadband provider TelstraClear from Australia's Telstra for $840 million.
**READ MORE:
* Infratil confirms it wants to buy Vodafone**
But it wasn't too long before Vodafone hatched a plan to partially cash-out.
In 2016, Vodafone proposed a partial reverse takeover of Sky TV in a deal that would have resulted in it owning a 51 per cent stake in a combined Vodafone NZ/Sky business, the remainder of which would have been listed on the NZX.
That deal would also have seen Vodafone paid out $1.25 billion in cash from the merged firm which would also have had to pay Vodafone $314m over 10 years for the right to use the Vodafone brand.
The proposal valued Vodafone NZ on paper at $3.4b but was shot down by the Commerce Commission the following year.
Vodafone subsequently tested the waters for floating a stake in Vodafone NZ on the NZX regardless, only to shelve that plan early last year when it emerged investors might not be willing to pay its asking price.
The plan was revived last year under new chief executive Jason Paris who was tasked with cutting costs and getting Vodafone NZ's accounts into better shape for a possible second-crack at listing next year.
But that was before the Australian Financial Review blew the lid on the possible alternative of a sale to Infratil and private equity.
Infratil – headed by former Telecom chief financial officer Marko Bogoievski – may be one of the few key Kiwi businesses with the expertise and experience to do proper due diligence on the complex Vodafone business, and that could make it a logical buyer.
The big question of price aside, these are five of the more gnarly issues that it may need to consider:
1. THE VODAFONE RESTRUCTURE
Vodafone NZ is rumoured to be in the midst of cutting its 2800-strong workforce by 400 jobs in what was to have been the prelude to a sharemarket float.
As part of the restructure, Vodafone has signed a five-year outsourcing deal with India's Tech Mahindra which will take over responsibility for providing phone support for Vodafone customers from India and from a new 'centre of excellence' it is establishing in Christchurch.
Some existing Vodafone call centre staff were offered new contracts with Tech Mahindra with a deadline to sign by Friday.
The Unite Union says Vodafone has denied redundancy to those staff but has labelled the contracts offered by Tech Mahindra as 'inferior and exploitative'.
One of the union's complaints is that the chosen staff would lose much of the redundancy entitlement they had accumulated as Vodafone employees, one year after joining Tech Mahindra.
Vodafone spokesman Richard Llewellyn would not say on Sunday how many staff had been offered the contracts, or how many had signed by the Friday deadline.
Customer service is a sensitive topic for phone and broadband users.
Infratil will need to make its own call on how well Vodafone is handling the transition to the outsourcing arrangement with Tech Mahindra, and what level of service Tech Mahindra will deliver.
2. TECHNOLOGY
It's an old adage that only half of the challenge of running a telco is providing the services, and the other is billing customers for them.
Vodafone NZ chief executive Jason Paris revealed last month that Vodafone was in the midst of migrating all its customers on to one technology stack, finally completing the absorption of TelstraClear which it took over in 2012.
The project began in February and if successful could greatly simplify the business. But any buyer of Vodafone NZ would want to have confidence that they, like Paris, could see 'the light ahead'.
3. WHAT ABOUT THE BRAND?
The merger of Sky TV and Vodafone NZ would have have seen combined business agree to pay $314m over 10 years to Vodafone for the right to continue to use the powerful Vodafone brand – a significant financial commitment.
A buyer of the business would need to decide how much value it saw in the brand, how long any commitment should last, and what might happen once any agreement expired.
That would be just one of the issues that would need to be considered when working out how easy it would be to split Vodafone NZ off from the wider business.
4. THE WHOLESALE MARKET
Vodafone wants Chorus to 'unbundle' its ultrafast broadband network at a price that would allow it and potential partner Vocus to invest in their own network electronics, but both say the price being proposed by Chorus to access to its raw fibre cables is unrealistic and would not make that economic.
Unbundling could hand larger retailers such as Vodafone an advantage in the broadband market, and Vodafone hopes the Government or the Commerce Commission will intervene to force Chorus to lower its proposed pricing.
But unbundling could be bad for smaller internet providers and Communications Minister Kris Faafoi has shown no sign of stepping into the fray to date.
Any buyer of Vodafone might need to assess whether there was any chance of a volume advantage emerging in the UFB market, or whether the status quo was more realistic.
5. 5G AND MOBILE
One potential attraction of buying into the telecommunications industry now is that after years of heavy investment in technology, such as 4G, there is a realistic chance that capital investment requirements may be on the decline for a while.
But Spark is chafing at the bit to invest in 5G, which could drive a need for Vodafone to respond.
The mobile market has settled into a pattern of steady and stable competition between Spark, Vodafone and 2degrees, but almost any change to the status quo carries risks.
New entrants would bring fresh competition, but any threat to Vodafone's rivals in the market could prompt regulators to look at new ways of encouraging competition, for example through the enforced wholesaling of mobile networks.
The Commerce Commission plans to publish its 'preliminary findings' into a review of the mobile market any day.
The review is probably a sleeper, but yet another topic on which any buyer of Vodafone would want to keep a watchful eye.