TPG Telecom recently became Australia's second-largest fixed-line broadband provider with more than1.8 million subscribers, while Vodafone Hutchison Australia is well on the road to recovery.
Both are coming up against stiff competition and neither has the scale to buy up the expensive content that rivals are using to make their products more attractive.
But putting the companies together would create a telecommunications powerhouse with the scale and infrastructure needed to take on Australia's biggest phone and internet provider, Telstra.
Australia's fixed-line and mobile providers are facing a decrease in the profit margins over the medium term thanks to the $56 billion national broadband network and an increase in competition.
The NBN is going to replace Telstra as the wholesale foundation for Australia's fixed-line internet services by 2020, if everything goes according to plan.
It will also slash the profit margins for ISPs like TPG and make it easier than ever for customers to switch providers if they're unhappy with their services. WHY THE DEAL SHOULD HAPPEN
In order to keep customers loyal, many providers aim to sell consumers a bundle of products that include internet, phone and mobile services as well as content subscriptions.
However, both TPG and Vodafone Australia lack the scale of its rivals to make big content deals worthwhile. In contrast, Telstra has signed the rights for the NRL and AFL on top of its Foxtel distribution while Optus recently won the broadcast rights for the English Premier League.
Bringing together TPG's 1.81 million subscribers and Vodafone Australia's 5.2 million customers would give both players the scale to make new exclusive content deals worthwhile, which in turn would attract fresh customers.
This is vital in a market where gaining scale is the key to getting meaningful profits.
Vodafone Australia would get excellent savings by shifting its mobile traffic onto TPG's network of fibre-optic cable connections that run throughout Australia's capital cities and even overseas.
But while Vodafone Australia was in dire straits three years ago, its shareholders – Vodafone Group in the UK and Hutchison Whampoa in Hong Kong – have spent more than $3 billion on network improvements alone in the past three years just to get it up to scratch.
Nether party is in distress and they will not need to start a fire sale anytime soon. UBS last year valued the asset at $7.4 billion.
TPG executive chairman David Teoh is loath to give up control and will struggle to raise that kind of money without greatly diluting his holdings or partnering up. He also has a lot of work to do paying down debt and integrating the recently-acquired iiNet division.
