Telstra Corporation Ltd (ASX: TLS) shareholders may have thought the ACCC handed them a leg up in the mobile sector after it ‘inadvertently’ let slip their decision on the proposed merger between TPG Telecom Ltd (ASX: TPM) and Vodafone Hutchinson Australia Pty Ltd (ASX: HTA).
Not So Fast…
As Rask Media founder Owen Raszkiewicz wrote this morning, TPG is headed to the Federal court to challenge the ACCC decision and it’s clear they intend to win after extending the term of the Scheme documents to 31 August 2020, “to allow sufficient time for the Federal Court process to conclude and for the merger process to be completed“.
The share price in Telstra was down ~2% yesterday indicating that the market wasn’t pricing in any benefit for Telstra shareholders just yet, as investors probably know there is a lot to play out before they can stop considering TPG as a competitor in the mobile sector.
Has The ACCC Got It Horribly Wrong?
Respected journalist Stephen Bartholomeusz called the ACCC’s decision ‘absurd‘ and made the point that while the ACCC can envision TPG competing in the mobile space, it is not the ACCC which has to fork out the billions of dollars in capital expenditure to do so. Touche Stephen, touche.
Is The ACCC Missing Something?
The ACCC says four mobile competitors is better than three, which is true. But, is it realistic?
Look at the financial performance of Vodafone Hutchinson Australia and you’ll see it’s been a loss-making operation — how are they expected to survive and continue competing with 5G? Hutchison lacks critical infrastructure, such as fibre, which Telstra, Singtel Optus and TPG all own.
TPG, on the other hand, faces a struggle to viably build a critical piece of infrastructure, mobile networks. It is hard to see how TPG can compete on their own in the mobile sector and survive.
It would appear TPG and Vodafone both have a critical piece of infrastructure the other doesn’t, so they both complement each other nicely and need each other to survive long-term.
I think TPG had to outlay cash for mobile network spectrum because it was do-or-die for them. The declining profit margins for broadband providers operating on the NBN, and consumers becoming more reliant on mobile devices, meant TPG had no choice if they wanted to survive long-term.
TPG Chair David Teoh most likely also took a calculated punt that Vodafone would agree to a merger. Who wouldn’t want to stop the bleeding from a loss-making venture?
It will interesting to see the outcome in the Federal Court. My best guess is that it gets approved. As a consumer of mobile internet, I hope it does.
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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).
Disclosure: at the time of writing, Andrew does not own shares in any of the companies mentioned.