A Commerce Commission preliminary issues paper on the Vodafone NZ-Infratil deal released this morning confirms Trustpower is the potential stumbling block - but indications are it will not be an insurmountable one.
NZX-listed Infratil and Canadian investment firm Brookfield are going 50:50 in a bid to buy Vodafone's New Zealand operations for $3.4 billion.
Infratil already has a stake in the telco business by dint of its 51 per cent share in Trustpower, which has gained just under 100,000 broadband customers over the past few years in a push to bundle internet with power.
Trustpower says its average revenue from each of its 96,000 broadband customers is $913.53 a year, or $88 million. That is less than a tenth of the company's total revenue.
But its true value is larger because power customers are much less likely to switch providers if they have to go to the hassle of changing their broadband too - and electricity customers spend an average $2276.40 per year with Trustpower.
In its communications to investors, Trustpower has celebrated steady gains in its broadband business, particularly the way it has boosted its bottom line by reducing churn (and it's sparked a wave of imitators, with Vocus buying power retailer Switch and Spark partnering with Genesis Energy, among other tie-ups).
But of course in the context of trying to get a deal cleared by a regulator which is gauging whether it will reduce competition, you have to play down success and put your worst foot forward.
Hence Infratil and Vodafone NZ's clearance application highlights that Trustpower has "only 5 per cent" of the broadband market that it has been "static for three years" (it stood at 4 per cent in 2016).
That's a change in emphasis from Trustpower's 2019 annual report which notes its broadband customers increased to 96,000 from 2018's 87,000 and 2017's 76,000 (which is right? Both - Trustpower piled on more broadband customers but it gained only 1 per cent share as the market grew).
No Vodafone influence on Trustpower, pair argue
Infratil and Vodafone also pledge that post-deal, "Vodafone and Trustpower will continue to operate as separate entities. The sole connection between Vodafone and Trustpower will be through a common, and, in Vodafone's case, indirect, shareholder."
They argue that the separate operations will, quite simply, be a legal requirement the way the deal is structured.
"Infratil's ability to influence the decisions made by Trustpower or Vodafone post-acquisition would be limited by company law and corporate governance requirements, including in Trustpower's case NZX listing rules requirements," they say in their application.
Infratil and Vodafone note that Trustpower has recently inked a wholesale deal with Spark to provide fixed-wireless broadband (or using Spark's 4G mobile network to deliver broadband into homes) and mobile service.
This supplements Trustpower's existing broadband business, which resells landlines form Chorus and other fixed network operators.
The following paragraphs are redacted from the public version of the clearance document, but there could they could address the issue of whether Trustpower continues its fixed wireless push with Spark - which would certainly ease the way to clearance.
Vodafone NZ also offers a fixed-wireless service, but has not promoted it much - in contrast to Spark, which has heavily pushed its fixed-wireless service over the past few years, signing up around 130,000 customers.
Vodafone NZ CEO Jason Paris has flagged fixed wireless as a major of growth if the deal goes through and his company is "unshackled" - but he may have to accept that a wholesale fixed-wireless wholesale deal with Trustpower is probably off the table.
Clearance likely, but at what cost?
Trustpower is currently Infratil's biggest asset, at $1.1b, followed closely by Canberra Data Centres at $841-$942 million and Wellington International Airport at $770-850m.
On May 20, Infratil chief executive Marko Bogoievski (who will serve as Vodafone NZ chairman if the deal is approved), said he was confident the deal would go through, and that issues related to Trustpower could be resolved.
"We actually like Trustpower and would like it to stick around in our portfolio," Bogoievski said.
Competition lawyer Michael Wigley told the Herald he thought the deal would likely gain regulatory clearance. While Infratil's majority stake in Trustpower was a hurdle, it was a relatively low one. A 5 per cent share of the broadband market was too small to make any difference on market power.
This size of the ComCom's issues paper - a scant six pages, making it a tiddler next to issues papers released around the (ultimately nixed) NZME-Stuff and Vodafone-Sky deals, also points to history being on Bogoievski's side.
If the medium is the message, then the message is that the deal is likely to get the green light.
If it did come down to Trustpower divesting its broadband business, Wigley noted that the ComCom would probably want the buyer to be a company other than Spark, Vodafone or 2degrees, which depress the price.
However, Infratil and Vodafone's clearance application is clearly angling to keep Trustpower in the fold with its assurances the power and broadband company would be run independently - and perhaps, beneath the redactions, a pledge that that would include Trustpower continuing its fixed wireless wholesale deal with rival Spark.
Submissions are due by June 14.
The Commerce Commission has set July 15 as its decision date.
The Overseas Investment Office is also expected to rule on the deal, given Brookfield's involvement. No timeline has been set, but Vodafone and Infratil have said they expect approvals to be resolved by August.
Trustpower shares opened flat at $7.37. The stock is up 30.44 per cent for the year.
Infratil shares opened down 0.7 per cent to $4.27 (shares were at $4.34 on May 14 when the deal was announced. Despite its recent dip, the stock is still up 26 per cent for the year.