Telstra shares dive as it faces losing regional monopoly from Optus, TPG’s blockbuster deal

A $1.6bn network sharing deal between Optus and TPG has prompted Telstra to ditch its yearly CPI-price increases for mobile plans, analysts says, as the telco faces multiple downgrades.

Telstra CEO Vicki Brady cited a ‘strongly’ performing mobile business as the reason to halt price increases, but analysts say increased competition from TPG and Optus is the more likely cause. Picture: John Feder/The Australian

Increased competition from a blockbuster $1.6bn network sharing deal between Optus and TPG has prompted Telstra to abandon its inflation-linked price rises for its mobile phone plans, analysts say, sparking a steep sell-off in its shares.

Australia’s biggest telco faced multiple downgrades from analysts on Wednesday, with its shares diving as much as 5 per cent to $3.39, a three-year low.

The sell-off was largely in response to lower than expected earnings guidance and Telstra’s plan to remove its annual inflation-linked price increases for mobiles – a surprise move given Australia’s biggest telco is racing to achieve $400m in cost savings as part of its ambitious T25 strategy.

Telstra said it would also sack 2800 staff – or 9 per cent of its overall workforce – as it loses ground to web calls and cloud services from bigger technology companies, which have been poaching its lucrative enterprise customers.

UBS analyst Lucy Huang said while the job cuts were expected given the poor performance of Telstra’s Network and Services business – sparked by a steep fall from corporate clients – the removal of CPI-linked price rises for mobile plans was a “key surprise”

Telstra chief executive Vicki Brady said a “strongly” performing mobile business was the reason for halting price hikes. But other analysts said the Optus-TPG deal, which will break Telstra’s monopoly in regional areas – which remains subject to regulatory approval – was the more likely cause.

Optus tower in Gympie.

Morgan Stanley cut its target price to $4.20, from $4.50, and revised earnings estimates lower, but emphasised it’s “a global and industry-wide issue” as “software companies are displacing traditional telcos for telephony and connectivity”.

“Central to our positive Telstra investment thesis is an expectation Telstra can deliver shareholders a progressive rising absolute dividend,” Morgan Stanley’s note states.

Jeffries analyst Roger Samuel said Telstra’s decision to hike prices in July did not rule out further increases. But he said the “scope is limited” for further rises,

“The main reason is the widening gap between Telstra and Optus, which has not raised prices since July 2022, and is likely to retain prices into the new year due to a leadership change,” Mr Samuel said in a note to investors

“New customer acquisition is getting more difficult given the macro environment and rising competition from low-cost brands, and although Telstra mentioned that subs performance has been consistent with 1H, we think it was because of lower porting in the industry.

“As such, Telstra may need to ramp up marketing spend, especially in the context of a potential MOCN (multi-operator core network) deal between Optus and TPG. The 3G switch-off in August could be a catalyst for customers in regional areas to consider their options.”

Morgans analyst Nick Harris agreed. “Other than noting the removal of the CPI price rise allows pricing flexibility, management did not concisely explain what prompted them to reverse this CPI linked pricing mechanism,” Mr Harris said in a note to investors.

“Regardless of the reason, this move makes us seriously reassess the previous bull view that Telstra … would remain in a period of pricing rationality for a few more years. We suspect competition is likely to re-intensify. Time will tell.”

A Telstra store in Roma. Picture: Lachlan Berlin

The network-sharing announcement comes after the competition watchdog knocked back a similar $1.8bn network-sharing deal between Telstra and TPG last year, ruling it was not in the best interest of market competition.

Optus and TPG’s 11-year multi-operator core network deal, remains subject to regulatory approval. If it gets the green light, it would begin next year, with TPG having the option to extend for a further five years.

Under the agreement, TPG would triple the number of mobile sites it has access to, transferring the few it has in areas where Optus doesn’t to the telco and decommissioning others.

While the vast majority of benefits appear to be in the favour of TPG, which increase its coverage from 400,000sq km to more than 1,000,000sq km, Optus interim CEO Michael Venter said last month that Optus would save a significant sum on the repair, restoration and upgrade on networks.

“TPG has two wins effectively. They don’t have to roll out their network, and they save on their operational expenses. And for us, we’ve already got a network that we get a contribution to the maintenance of and then swap out of that network,” Mr Venter said.

“We are pretty confident that the ACCC will be supportive of it. When they knocked back the previous transaction, they did not close the door completely on a transaction like this.”

TPG boss Inaki Berroeta said TPG firmly believed that the only “feasible” way to expand network coverage was through partnerships.