The ACCC recently announced that it would oppose the merger between Vodafone (VHA) Australia and TPG Telecom (TPG). The decision was accidentally released a day early and sent TPG shares down 13%.
In this wire, we take a look at what the thinking was behind this decision, what options TPG & VHA have in light of the decision and who the likely winner is.
The ACCC decided to oppose the merger on the grounds that three operators in the market, Telstra, Optus and VHA control over 87% of the mobile services market. It commented also on the fixed broadband market, stating “The fixed broadband market is concentrated, with Telstra, TPG and Optus having approximately 85 per cent share.”
In its view, the ACCC concluded that a merger between VHA and TPG “…will reduce competition and contestability in this sector.”
Earlier this year TPG announced it had halted the roll-out of its mobile network due to the ban placed by the Federal government on Chinese equipment manufacturer Huawei. This did not seem to perturb the ACCC as Rod Sims, the Commissioner of the ACCC, assured the public that “TPG has the capability and commercial incentive to resolve the technical and commercial challenges it is facing, as it already has in other markets. TPG already has mobile spectrum, an extensive fibre transmission network which is essential for a mobile network, a large customer base and well-established telecommunications brands.”
TPG and VHA both released a statement that they “…remain committed to the proposed merger” and that they “…will file legal action in response to the ACCC decision.”
They argue that, whilst three players do dominate both mobile services and broadband in Australia, the ACCC fails to account for the fact that one player Telstra already has the dominant position. A combined VHA and TPG would create a stronger integrated telco that will be better able to compete with the two largest players Telstra and Optus.
History suggests that TPG/VHA have the upper hand as the ACCC has lost previous cases against Metcash/Franklins and AGL/Loy Yang where both cases were heard in front of the Federal Court.
Assuming this route fails, TPG could look to build out the mobile network on its own. However, we think this is unlikely unless the ban on Huawei equipment is overturned which we do not believe will occur.
On the day of the announcement the market sold off Telstra (down 3%) in a knee-jerk reaction by assuming that the rejected merger would lead to increased competition. We actually believe that TPG/VHA are more likely to be rational with their pricing in broadband and mobile markets whilst the court case is being heard. Additionally, Optus also appears to have become less aggressive with its mobile plans, and thus we believe Telstra is well positioned to benefit from the current industry structure, which will remain while the Federal Court hears the appeal which could take up to 18 months.
IFM Investors Pty Ltd, ABN 67 107 247 727, AFS Licence No. 284404, CRD No. 162754
This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for financial advice. IFM Investors Pty Ltd owns shares in its own right, and in the funds it manages on behalf of clients, in Telstra Corp and TPG Telecom.