Telco share prices rally on back of TPG/Vodafone merger talks

The proposed $10 billion merger between TPG Telecom and Vodafone Australia has sent telecommunications companies's share prices soaring, with investors and industry experts saying it has the potential to calm a price war in the mobile sector.

TPG Telecom, led by reclusive billionaire David Teoh, said in a statement to the ASX on Wednesday it had entered "exploratory discussions" with Vodafone about a potential merger of equals, noting there was no guarantee any transaction would proceed.

A potential merger of TPG and Vodafone sent telco share prices surging on Wednesday.Credit: Rob Homer

The mobile sector has been experiencing a period of intense competition, with revenues falling across the industry as phone plan prices are squeezed and data inclusions skyrocket.

TPG Telecom’s much-awaited launch of a budget-focused fourth mobile network has long been expected to further intensify this pressure on telcos.

TPG’s share price surged 21.62 per cent to $7.65. Telstra’s share price was up 7.21 per cent by close to $3.27 in its strongest day in over a decade on the back of the news.

Market sources said some hedge funds had closed out short positions in these stocks, exacerbating the share price rise.

Vocus chief executive Kevin Russell told Fairfax Media the merger discussions was a “good thing” for competitors in the market, as his company posted a 17 per cent fall in net profit for fiscal 2018. Vocus Group’s share price jumped 7.42 per cent to $2.75 by close on Wednesday.

“Anything that is a distraction from the day-to-day focus is good for competitors,” Mr Russell told Fairfax Media.

“[If] if competitors are focused on transactions, rather than competing in the market against us, then we will be running even harder to take share from them,” Mr Russell said.

A Vodafone statement said the discussions were “non-binding” and described the two companies as “complementary”.

TPG, which provides broadband services under its own name as well the iiNet and Internode brands, has been planning to become the fourth entrant to Australia's already crowded mobile market. It's in the process of building its own network to compete with Telstra, Optus and Vodafone.

A merger with Vodafone, the third-biggest player by subscriber numbers after Telstra and Optus, could spell the end of these plans.

Gaurav Sodhi, deputy head of research at Intelligent Investor whose funds own TPG stock, is “supportive” of the deal.

“As the TPG stock price tells you, it’s a brilliant move if it happens,” Mr Sodhi said.

By bundling net broadband and mobile services, TPG could increase its average revenue per user and decrease churn and, he said, could theoretically result in a more aggressive push into mobile.

“Vodafone has been underperforming for years but they are custodians of a high quality, much improved network. Get that network into the hands of a management team with the strategic nous and cost control of TPG and you have yourself a formidable competitor,” he said.

Telsyte managing director Foad Fadaghi said the moves could signify a reprieve for the telcos, with some speculating it could mean the end of the price war on mobile.

"It does indicate the fragility of the telecommunications sector right now, but the whole telco industry might be breathing a sigh of collective relief given the aggressive approach take by TPG to get to this point," he said.

Australian Communications Consumer Action Network chief executive Teresa Corbin described the potential merger as “problematic” for customers. TPG is the third biggest fixed line internet provider behind Telstra and Optus.

“TPG and Vodafone have had a partnership regarding mobile services for some time and this has been good for customers seeking discounts through bundling," Ms Corbin said.

“It’s hard to see if consumers will get the same benefits from a full merger if this leads to products being removed from sale and there are less options in future," she said.

Boost Mobile founder Peter Adderton, who has been vocal in arguing Australia cannot sustain four mobile networks, also warned this wouldn't be good for consumers as "we’ve seen a network that’s not even launched, a network that hasn’t sold one product, create more downward pressure on mobile pricing and consumer-friendly activity than the top three have ever delivered without this threat by a new entrant".