Infratil can unlock hidden Vodafone value

Infratil is among the few companies able to unlock Vodafone New Zealand’s value. There is untapped potential. It may not be immediately obvious to other potential buyers.

That potential didn’t excite enough interest when the company was taken on the road after the Sky TV merger failed. Presumably, buyers looked in the wrong direction.

Most people see Infratil as an infrastructure company. It is that.

Infratil hold TrustPower key

Infratil also owns a little over half of electricity retailer TrustPower. This is the key to unlocking Vodafone’s value.

TrustPower isn’t any electricity retailer. It is also New Zealand’s fourth largest internet service provider.

Number four doesn’t mean big. Last year’s Commerce Commission monitoring report said TrustPower has a five percent market share of broadband connections.

That’s small. Even when added to Vodafone’s 26 percent, the two don’t get close to Spark. That company still has more than 40 percent of all connections.

Small but potent

If Vodafone plus TrustPower doesn’t alter the broadband balance of power, what is disruptive here?

The answer is Trustpower has found how to make more profit from connections. It sells bundles combining broadband and power in a single bill.

Buying Vodafone opens the door to a million Vodafone customers. Many of these will also buy electricity.

It turns out broadband and electricity are a potent mix. They may go together better than, say, broadband and pay TV.

Would you like fries with that?

TrustPower isn’t the only company to find value in the “would you like fries with that?” broadband and power proposition. Vocus acquired a small electricity retail business. It has been selling power to its customers.

Electricity and broadband have worked for TrustPower.

Both services need investment in billing systems. Billing is a large cost for both electricity and broadband retailers. Putting two services on a single bill trims costs. It increases margins by more than you might imagine. A few dollars per month times thousands of customers soon adds up.

Remember Vodafone has struggled in the past with billing.

There are other efficiencies. You don’t, for example, need to run separate call centres for power and broadband customers.

Golden handcuffs

These cost savings are nothing compared with the value Trustpower gets from having customers buy both services at once.

Customers who buy more complex bundles of services are less likely to go elsewhere. TrustPower cuts churn every time a power customer signs up for broadband. This also works the other way around.

A million Vodafone customers have already proved they are creditworthy. There is probably enough data to know which customers are difficult to deal with. It may even be easy to identify homeowners or lead tenants, the people most likely to buy electricity.

Asymmetric information

There’s another aspect to TrustPower’s offer.

You’ll notice TrustPower’s advertising splashes the headline price of broadband. Usually this is so much a month less than other high profile broadband retailers. In some cases, the first months are discounted. A normal rate kicks in a few months into a 24-month contract.

TrustPower sweetens deals by offering Samsung flat screen TVs or other inducements.

It’s easy for consumers to comparison shop for broadband. There aren’t many speed and data options.

Selling photons and electrons

It’s harder to comparison shop for power Both are low margin products. Both are competitive markets. It is often easier to make more profit selling electrons than photons.

Vodafone and TrustPower under a single umbrella means more market power. That’s not helpful when it comes to inputs, companies buy broadband at regulated prices from wholesalers like Chorus and Enable. It is helpful when muscling to the front of a queue with partners.

We haven’t even mentioned TrustPower’s earlier bid to establish a mobile virtual network operator business. If nothing else, the company’s executives would have looked closer at the economics of selling mobile. This is Vodafone’s core business.

Infratil invests in infrastructure

Vodafone was due to float next year. The parent company, the UK-based Vodafone Group, wants to get as much of its New Zealand investment out of the country. It plans to invest in places like India where there is more long-term potential.

One challenge Vodafone faces and would otherwise continue to face is finding funds to invest in 5G. Doing the job properly would cost the thick end of a billion dollars over the next decade. Infratil can cover the spend.

Sure, Vodafone has other attractions. It won’t all be about cross-pollination with TrustPower. Yet the million-plus creditworthy mobile customers who might be persuaded to switch electricity retailer, are an important part of the company’s value.