The proposed acquisition of Australasian telecom company M2 Group [ASX: MTU] by Vocus [ASX: VOC] is expected to raise vertical integration issues in New Zealand, although an independent competition lawyer and an industry source believe an approval from the New Zealand Commerce Commission (NZCC) is still likely. 

Vocus submitted an application to the NZCC on 9 October.

The deal isn’t expected to cause a noteworthy reduction in competition in the telecommunications retail market because the two companies operate different businesses in New Zealand, the industry source said.

M2 is predominantly a retailer although it owns some network infrastructure and has a small wholesale division, the industry source said. The industry source said M2 has about 16% of the retail Internet Service Provider market via its recently-acquired CallPlus; a person familiar with the situation put its retail ISP market share at just below 15%. Other New Zealand-based brands under M2 include Slingshot, Orcon, Flip and2talk.

Vocus, on the other hand, is largely a wholesaler, providing backhaul fibre services to corporates, government bodies and other telecom services providers through its FX Networks business. It has less than 1% of the retail ISP market in New Zealand, the industry source said.

The independent competition lawyer added the only overlap between the two companies in the retail space is bundled fixed line packages. This is not enough to pose a problem for the regulator, the independent competition lawyer and person familiar with the situation said.

However, one question the regulator may have is how the merged entity will ensure the backhaul market remains competitive following the vertical integration, the industry source added.

Vocus provides M2 with some backhaul services in New Zealand, the first and a second person familiar with the situation said.

One or two corporate customers have brought the deal to the attention of industry body Telecommunications Users Association of New Zealand (TUANZ), it is understood. The TUANZ is not expected to make a formal submission to the regulator about the deal, but is likely to raise the issue informally in its regular meetings with NZCC.

Both companies provide business fixed-line services, but the combined share is still expected to be below the NZCC’s concentration levels, the first person familiar said.

While this proposed deal does raise vertical integration issues, it would broadly be a pro-competitive deal since Spark [NZX: SPK, ASX: SPK] and Vodafone New Zealand are already such large players in the country, the independent competition lawyer said. Spark (formerly known as Telecom New Zealand) is the largest fixed-line retailer, according to the NZCC’s 2014 Annual Telecommunications Monitoring Report.

Both the independent competition lawyer and the industry source expect the NZCC to approve the M2 sale because it previously approved Vodafone New Zealand’s AUD 669m acquisition of TelstraClear in 2012. This could be used as a precedent deal by Vocus, the industry source added.

As a result of the 2012 deal, Vodafone is now vertically integrated in New Zealand’s key cities, the industry source said. Prior to a structural separation (demerger) in 2011, Telecom New Zealand was another large vertically-integrated telecom operator.

The NZCC merger review typically takes six to eight weeks, the independent competition lawyer said. This same lawyer does not expect significant delays at the NZCC because the watchdog is currently reviewing only two other merger applications: Wilson Parking New Zealandand Z Energy.

On 28 September, Vocus and M2 announced a scheme proposal where M2 shareholders will receive 1.625 Vocus shares for each M2 share, implying an offer price of AUD 10.24.

M2 shares are down 0.84% today to AUD 9.42 while Vocus are up 1.29% to AUD 6.30.

Vocus and M2 declined to comment.