TPG Telecom Ltd & Vodafone to rival Telstra Corporation Ltd

Is there another reason to sell your Telstra Corporation Ltd (ASX:TLS) shares?

| More on:
a woman

You’re reading a free article with opinions that may differ from The Motley Fool’s Premium Investing Services. Become a Motley Fool member today to get instant access to our top analyst recommendations, in-depth research, investing resources, and more. Learn More

In a major deal that would transform the future of Australia's internet services and mobile phone sector TPG Telecom Ltd (ASX: TPM) and Vodafone Hutchinson Australia (VHA) today announced an agreement to a merger of equals that would combine the two companies.

If the deal is approved by the Australian Competition and Consumer Commission (ACCC) the merged group would be 49.9% owned by TPG shareholders and 50.1% owned by VHA's existing shareholders, who are its parent companies the Vodafone Group and Hutchinson Telecommunications.

If combined the group would have a market value around $15 billion with EBITDA of $1.8 billion on revenue of $6 billion. It'll also have a combined net debt to EBITDA of 2.2x, which represents a whopping $3,616 million in debt, with TPG contributing $1,672 on top of VHA's $1,944 million plus upcoming debt-funded 5G spectrum payments.

The combined entity will also aim to pay out at least 50% of net profit in dividends with the strong free cash flow generation (associated with the telco sector) likely to prove popular with dividend-hungry institutional investors that recently abandoned TPG on the back of its dividend-demolishing capital investment plans.

TPG also announced plans to "separate" its nascent Singapore mobile services business as part of the deal, with the deal to be completed via an "in specie distribution" presumably of cash or scrip in the Singapore business.

In addition existing TPG shareholders may be in line for a one-off special fully franked dividend if the deal goes ahead and TPG's net debt position is within certain special covenants.

The glue behind the merger is the coming of next generation 5G super-fast mobile network technologies that could offer an alternative to nbn broadband to cost conscious consumers looking to pick up a single household and mobile internet services bill.

The merger will also bring substantial cost savings for both businesses in the terms of cutting call centre support costs, sharing backhaul networks, and existing mobile infrastructure that TPG was in the middle of a costly process of investing in.

Moreover, there's also the potential both companies can cross-sell products to consumers with the "bundling" of mobile and home internet services (at a relative discount for the consumer) a key sales strategy in the fight for market share of telco giants like Optus, Telstra, TPG and Vodafone.

After news of the deal officially hit the market Telstra's share price rose strongly as investors bet that a new triumvirate of Optus, Telstra and TPG would refrain from engaging in a mobile price war given the market would be large enough to sustain profitable pickings for three major players.

This may true to an extent and a short-term benefit to Telstra, but over the medium term I expect the deal will prove another negative to Telstra investors as TPG's superior management and operational performance see it attack Telstra's margins and take its market share.

As such I'd use strength in the Telstra share price to exit a position in a business that looks likely to keep shrinking over the long term.

For TPG shareholders the significant obstacle ahead is the ACCC's approval, which is likely to rest on the argument that the merger diminishes a duopoly rather than creates an oligopoly.

Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited. You can find Tom on Twitter @tommyr345 The Motley Fool Australia owns shares of and has recommended TPG Telecom Limited. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

More on Share Market News

Happy man working on his laptop.
Share Market News

5 things to watch on the ASX 200 on Monday

A good start to the week is expected for Aussie investors. Here's what is happening.

Read more »

Woman in celebratory fist move looking at phone
Broker Notes

Top brokers name 3 ASX shares to buy next week

Brokers gave buy ratings to these ASX shares last week. Why are they bullish?

Read more »

A young man pointing up looking amazed, indicating a surging share price movement for an ASX company
Broker Notes

These ASX 200 shares could rise 20% to almost 30%

Analysts are tipping these shares to deliver big returns over the next 12 months.

Read more »

A young woman carefully adds a rock to the top of a pile of balanced river rocks.
Share Market News

Here's how the ASX 200 market sectors stacked up last week

Energy and utilities stocks led the way last week with 4%-plus gains.

Read more »

Animation of a man measuring a percentage sign, symbolising rising interest rates.
Share Market News

Here's when Westpac says the RBA will now cut interest rates

Will borrowers need to wait until the middle of next year for relief? Let's find out.

Read more »

Boys making faces and flexing.
Opinions

3 ASX 300 shares to buy and hold for the long run

I believe these stocks have loads of growth potential.

Read more »

Young girl drinking milk showing off muscles.
Share Gainers

Here are the top 10 ASX 200 shares today

It was a great end to the trading week for ASX investors today.

Read more »

Hands reaching high for a trophy with a sunset in the background.
Record Highs

The ASX 200 Index is on its way to another all-time high today. Here's why

These blue chip stocks are driving the index towards a new record today...

Read more »