TPG-Vodafone merger could still be on the cards

The competition watchdog may have raised a red flag over the proposed tie-up between telcos TPG (ASX: TPM) and Vodafone (ASX: HTA) but there’s still life in the deal, says Morningstar.

The Australian Competition & Consumer Commission fears the deal may stifle competition in Australia’s telco sector and lead to higher prices for customers.

But Morningstar analyst Brian Han says it’s premature to write off the deal, and that the merger partners will strive to address fears about reducing competition.

Han says much could change before the final determination due in March next year.

"The final decision will hinge on feedback and submissions from interested parties," Han says in his latest update.

"It goes without saying that TPG and Vodafone will do their utmost to address the competitive concerns.

"The ACCC will be bombarded with reasons why the merged entity's size, scale and strength will enable it to better invest and compete against incumbents and innovate for the benefit of concerns across all telecom segments."

The fate of the TPG-Vodafone tie-up will come down to the ACCC's resolve, says Han

In August this year, TPG and Vodafone Hutchison Australia announced they were in merger talks, a tie-up that would potentially have more than 1.9 million fixed-line customers and 6.1 million mobile customers.

The competition watchdog, however, cast doubt on the deal, saying it could result in higher mobile prices for Australian consumers.

The ACCC said the removal of TPG as a price-aggressive fourth entrant into the telecom market was likely to result in a substantial lessening of competition.

“Our preliminary view is that TPG is currently on track to become the fourth mobile network operator in Australia, and as such it’s likely to be an aggressive competitor,” ACCC chairman Rod Sims said.

"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.”

Han believes the other major telcos – Telstra, Optus and Vocus – are unlikely to mount much resistance to the merger as a fourth competitive force in TGP would intensify the already ultra-competitive mobile and broadband markets.

The fate of the TPG-Vodafone tie-up will come down to the ACCC's resolve, and the force of submissions from consumer interest groups.

TPG is trading at $6.72, slightly above its fair value estimate of $6.10. Hutchison Telecommunications – which owns a 50 per cent stake in Vodafone Australia – is trading at $12c. It is not covered by Morningstar.

Telstra (ASX: TLS) is trading at $2.93 against a fair value estimate of $4.40. Vocus Group (ASX: VOC) is trading at $3.45, against a fair value of $2.90.

Han sees vast differences in the culture of TPG and Vodafone, which may hinder their ability to gel.

"TPG has grown to its current size with a modus operandi premised on an extremely lean cost structure and an entrepreneurial spirit more akin to a private, nimble company," Han said.

"Vodafone on the other hand is a stereotypical, buttoned-down corporate entity with its attendant hierarchy and multi-layered decision-making processes.

"How these two cultures will gel as a single company will be complicated by the fact that TPG executive chairman David Teoh will likely step back from day-to-day operational involvement."

The ACCC has called for submissions from interested parties and will release a financial decision on 28 March 2019.