Equities

We’ve recently seen some developments in relation to the proposed TPG-Vodafone merger, including the ACCC announcing it will block the merger. By way of quick recap, in August last year, TPG and Vodafone Australia announced the intention to merge – a transaction that would bring together TPG’s strength in the fixed broadband market, and Vodafone’s strength in the mobile market.

This was seen at the time as a good thing for Telstra, because TPG had previously announced plans to enter the mobile market on its own as the fourth network operator, and the merger would mean that instead of becoming a four player market, mobile telephony would remain a three player market.

Since that time, there have been a few twists and turns. The first one came in December last year, when the ACCC announced that it had concerns with the proposed merger and may oppose it, on the grounds that a four player market is better than a three player market. Soon after that, in January, TPG announced that it was no longer planning to become a mobile network operator, blaming this on the Federal Governments ban on the use of Huawei equipment in 5G networks in Australia.

At the time, this announcement was seen as potentially a move to force the ACCC’s hand, by eliminating the prospect of TPG becoming the fourth operator, and thereby eliminating the rationale for the ACCC to block the merger.

However, last week, in a decision that surprised many industry observers, the ACCC announced that it has decided to block the merger. Essentially, the ACCC is saying that even though TPG has announced that it won’t build a network, it still might.

It’s possible then, that the ACCC thinks that TPG may be bluffing when it says it won’t build a mobile network, and that by blocking the merger, the ACCC can change TPG’s mind.

Interestingly, it’s also possible that TPG was bluffing when it made the original announcement that it would become the fourth operator, and that part of the rationale for this was to put pressure on Vodafone to agree to a merger. On our analysis, it was always hard to see how TPG could justify becoming the fourth mobile operator, given it’s a business where scale economies are important, a 4G network will soon start to lose relevance, and the magnitude of the investment needed to upgrade to 5G is very large.

In any event, we think that the likelihood of TPG becoming an effective competitor in the mobile market on its own is reasonably low, and that the current uncertainty will cause disruption for Vodafone potentially to the benefit of the other players, being Telstra and Optus, so all in all we see this as a marginal positive for Telstra.

There is still some way to go before this is resolved, with Vodafone and TPG saying they will challenge the ACCC in the Federal Court, and a lot of observers thinking they have a good chance of success, but whatever the outcome of that challenge, we think Telstra is in a strong position to grow revenue and its subscriber base in the years to come as new applications for 5G technology start to emerge.




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