TPG-Vodafone merger positive for incumbents, says Morningstar

Today's announcement of a $15 billion merger between Vodafone Australia and TPG Telecom (ASX: TPM) would benefit Australia's telco sector, according to Morningstar's Brian Han.

Han says the deal holds "very positive implications" for Australia's largest telco, Telstra (ASX: TLS), in removing the mobile margins threat of a fourth player.

The two companies on Thursday confirmed to the ASX they plan an all-scrip, merger-of-equals, following discussions last week.

Under the deal – which remains subject to regulatory approval – TPG shareholders would own 49.9 per cent of the group, with Vodafone Australia shareholders owning 50.1 per cent.

The merged company would be called TPG Telecom Limited, with a combined value of about $15 billion and annual revenue of $6 billion.

Han says the move will consolidate the profit pool among local telcos.

"Instead of having a new fourth player in the mobile telecommunications industry, you are going to remain a three-player market, which means that mobile profit pool of the industry will continue to be shared between three players instead of four," he says.

"Telstra's shares have been under pressure over the past 12 months because of this fear that TPG, as a fourth mobile player, will eat into the margins of everybody else or the incumbents in the industry."

Vodafone ranks third in Australia, when measured on subscriber numbers

Current Vodafone Australia CEO Inaki Berroeta said the merged group will become a stronger challenger to bigger rivals Telstra and Optus.

"The combination of the two companies will create an organisation with the necessary scale, breadth and financial strength for the future," says Berroeta.

"The equal terms of the combination preserves the competitive strengths of the two businesses, meaning a sustainable long-term fixed/mobile competitor to Telstra and Optus."

The big winners of the merger would be Australian consumers, he added.

The fourth-ranked Australian telco in terms of market capitalisation, TPG ranks second when measured on broadband subscriber numbers. It provides services for the latter under its own name as well as iiNet and Internode brands.

Vodafone is Australia's third-biggest player by subscriber numbers, after Telstra and Optus.
TPG recorded a fall in profit at its first-half results in March as subscriber numbers fell. It became the fourth Australian mobile network provider, spending $1.9 billion on the roll-out so far.

Telco sector players have had their margins pressured by the rollout of the National Broadband Network and competition in the Australian broadband and mobile market has been intensifying as incumbents deal with challengers - such as TPG - and the NBN impact.

Industry commentator Paul Budde believes Vodafone would gain a substantial boost to subscribers if a merger did proceed, just as TPG could extract considerable cost savings on the ongoing build of its mobile network.

Glenn Freeman is senior editor, Morningstar Australia

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