The TPG Telecom Ltd (ASX: TPM) share price fell around 17% on Thursday following a supposed knockout blow from the Australian competition regulator, the ACCC.
Who is TPG?
TPG Telecom is one of Australia’s largest broadband and mobile phone providers, with around 2 million broadband subscribers. It also has mobile operations in Singapore and about 400,000 mobile subscribers here in Australia.
A few years ago TPG pushed back against Government restrictions to build its own fibre optic network cable system, known as ‘fibre to the basement’. The network would connect inner city suburbs and apartments. The Government didn’t like it because TPG might have undercut their National Broadband Network!
What Happened Today?
Earlier in the year, TPG announced its plans to merge with the owner of Vodafone Australia, Hutchison Telecommunications Ltd (ASX: HTA). It would be a potential $15 billion deal and see Vodafone’s extensive mobile network and subscribers join with TPG’s expansive broadband network.
The deal was supported by both companies and TPG’s major shareholder in Washington H. Soul Pattinson & Co. Ltd (ASX: SOL).
Long story short, the ACCC has been poking holes in the deal and today announced its “preliminary” finding, which we covered in this article.
“Our preliminary view is the merged TPG-Vodafone would not have the same incentive to operate in the same way, and competition in the market would be reduced as a result,” the ACCC’s Chair Rod Sims said.
What Now?
Personally, I think TPG is a decent company and it’s incredibly well-run by Executive Chairman David Teoh. That’s why I included it as one of the three shares in my free investing report, 3 Proven ASX Shares.
I think the first point to note is the ACCC decision is just a preliminary decision. If I lick my finger and put it to the wind (i.e. I make a guess) I would say the chance of the deal going through is now less than 50%. However, I wouldn’t be surprised if it did go ahead – stranger things have happened.
One of the issues ACCC took with the deal is that TPG may no longer be as competitive with other players like Telstra Corporation Ltd (ASX: TLS) with its aggressive pricing.
“If TPG remains separate from Vodafone, it appears likely to need to continue to adopt an aggressive pricing strategy, offering cheap mobile plans with large data allowances,” Chair Sims said.
TPG’s decision to launch a 5G mobile network in Aussie capital cities is undoubtedly going to shake up the industry and be a net good for (inner city) consumers. And how do I know that? Well, TPG offered unlimited data plans for free at first and then at a price of less than $10 per month. That’s very cheap.
“A mobile market with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers,” Sims said.
I somewhat disagree. I think there’s also a chance that a successful deal would produce an even more fierce competitor for leaders Telstra and Optus, owned by SingTel. And if the combined company decided not to continue to be aggressive on plans then Optus, Telstra and others like Dodo, owned by Vocus Group Ltd (ASX: VOC), would keep innovating.
A combined TPG-Vodafone would have about 6.4 million mobile subscribers and 2 million broadband subscribers. That compares to Telstra’s 3.6 million broadband subscribers and 17 million mobile plans, and Optus’ 1 to 1.5 million broadband subscribers and 10 to 12 million mobile subscribers. Both of the big players have announced plans for 5G.
Time to Buy TPG shares?
A prudent investor would never have banked on the deal going through. However, the underlying TPG business, while it faces considerable competition and potential margin compression, is relatively healthy so that offers some downside protection.
Having said that, as I noted in my Proven Shares report, it’s probably not the type of company I want in my share portfolio because it doesn’t have a strong moat or ‘competitive advantage’. Therefore, its share price would have to fall further before I would consider overlooking the weak moat (in exchange for compelling valuation).
Until then, I’ll focus on other great companies, like the two small caps in the free report below…
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