The ACCC released a statement today stating it would not appeal the Federal Court's recent decision regarding the proposed TPG Telecom Ltd (ASX: TPM) and Vodafone Hutchison Telecommunications (Aus) Ltd (ASX: HTA) merger.
The ACCC had previously blocked the merger, believing that it would substantially lessen competition.
Did the Federal Court make the right decision?
The ACCC argued that having only 3 major telco providers rather than 4 would lessen competition. However, I am not convinced about this conclusion.
I don't believe that the Australian market is large enough to support 4 independent mobile networks and the costs associated with maintaining them, especially considering Australia's sparsely populated areas.
If you compare Australia's telecommunications market to other developed telco markets across Asia and Europe, 3 major providers seems very reasonable to me in terms of a fair competitive environment.
I think that TPG would have struggled on its own to build a mobile network over our vast distances. And in any case, TPG had already made the decision not to proceed with its mobile network rollout.
How will the merger benefit TPG and Vodafone?
I believe TPG-Vodafone will now be in a much stronger position to compete with the current largest telcos in Australia, Telstra Corporation Ltd (ASX: TLS) and Optus, in both the fixed broadband and mobile segments of the market. As such, the merged entity will be much better placed to grow revenues and profitability over the next few years.
On its own, TPG was unlikely to be strong enough to provide sustainable long-term competition to Optus and Telstra in the fixed broadband market. This market is now a very cut-throat environment due to the high wholesale prices charged by NBN Co and the tight operation margins that fixed broadband operators must contend with.
The extra scale will place the newly merged TPG-Vodafone in a much stronger position to compete, reaping better margins and therefore, higher profits. In addition, the new entity will be well placed to provide new consumer product offerings such as bundled packages, which may well translate to higher market share and in turn, higher revenues.
Not only will there be a benefit in the fixed broadband segment, but TPG-Vodafone will also be in a much stronger position to roll out a competitive 5G offering, driven by Vodafone's current network.
How will the merger impact Telstra?
I believe the merger plans will have some degree of positive impact on Telstra's long-term growth prospects. Telstra will now only have to contend with two major competitors in the mobile space, with the potential of a fourth mobile operator entering the market now fairly much eliminated.
A fourth mobile operator entering the market would have no doubt raised market competition. Having said that, I believe that any benefit Telstra is likely to gain will only be small as the merger of Vodafone and TPG is likely to create a much stronger third competitor in the mobile sector.
Foolish takeaway
I view the merger decision as beneficial for the Australian telco industry as a whole. With this, I believe that both TPG Telecom and Vodafone will benefit from the merger which could see an uplift in share prices over the medium term. Additionally, I also believe there will a benefit, albeit a smaller one, to Telstra moving forward.
