Is Telstra in for a bruising fight with merged TPG-Vodafone?

Now that the merger between TPG Telecom Ltd (ASX: TPM) and Vodafone is just about done, attention is on the impact to Telstra Corporation Ltd (ASX: TLS).

| More on:

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

Now that the merger between TPG Telecom Ltd (ASX: TPM) and Vodafone is just about guaranteed, attention is turning to what that means for Telstra Corporation Ltd (ASX: TLS).

Our third largest mobile phone operator is bulked up and its new chief executive Iñaki Berroeta appears to be spoiling for a fight to win market share from Telstra.

However, the merger may be what the sector needs and may prove to be a positive for shareholders.

Will a new mobile war erupt?

Just don't tell Berroeta that. He indicated in an interview with the Australian Financial Review that competition will be heating up as he needs to prove that the $15 billion merger was worth all the trouble.

The ACCC tried unsuccessfully to scuttle the marriage by arguing that competition will lessen with only three players in the field compared to four if TPG remained a separate entity.

The courts took TPG's and Vodafone's side, so the newlyweds can't contradict themselves now.

Biggest winners are investors

But if you taught that customers will be the biggest beneficiaries from the new development, you are probably wrong. Investors may benefit more.

This is because the cut-throat pricing tactics used to take market share will probably take a backseat in the new world order for the sector.

"The last four years in Telco can been characterised as a lot of competitive tussle to achieve no meaningful change in market share and lower profits," said Morgans.

"With the NBN nearing completion, 5G nearing mainstream launch, and TPG / Vodafone set to merge in July, the market is returning to more rational economics, in our view."

Same war but different tactics

Other experts have said similar things. The new tactic to win market share is through bundling instead of outright price cuts.

UBS believes that the upside for the new TPG-Vodafone group, which should start trading on the ASX on Monday under the code "TPG", will be from cross-selling of services.

The broker believes only 23% of Vodafone's customers use a residential broadband service offered under the TPG umbrella and only 45% of TPG's fixed broadband customers use mobile phone services that's on the Vodafone network.

So, while competitive pressure will remain to the benefit of consumers, the change in tactics will not hurt margins in the same way as outright price cuts of the past.

Foolish takeaway

That leaves shareholders as the biggest winners, in my view.

And if you are wondering which stocks represent the best value in the telecoms sector, Morgans reckons its TPG and Superloop Ltd (ASX: SUL).

It's also worth noting that TPG will spin out its Singapore operations into a newly listed company called Tuas. Existing TPG shareholders will get one share in each of the newly formed entities.

Brendon Lau owns shares of Telstra Limited and TPG Telecom Limited. The Motley Fool Australia's parent company Motley Fool Holdings Inc. owns shares of SUPERLOOP FPO. The Motley Fool Australia owns shares of and has recommended Telstra 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 Technology Shares

A young man punches the air in delight as he reacts to great news on his mobile phone.
Technology Shares

Buy alert: Why this broker just upgraded DroneShield shares

Bell Potter is feeling bullish about this high-flying stock.

Read more »

Delighted adult man, working on a company slogan, on his laptop.
Technology Shares

Macquarie forecasts 25% upside for this ASX All Ords software company

The business signed three new contracts in the June quarter.

Read more »

Man looking happy and excited as he looks at his mobile phone.
Technology Shares

DroneShield shares race higher on 480% revenue surge

It was another explosive quarter for this high-flying stock.

Read more »

A man slumps crankily over his morning coffee as it pours with rain outside.
Technology Shares

Why is the Appen share price crashing 15%?

This AI stock is having a tough time on hump day. But why?

Read more »

A young woman lifts her red glasses with one hand as she takes a closer look at news about interest rates rising and one expert's surprising recommendation as to which ASX shares to buy
Technology Shares

WiseTech share price higher on big news

This tech stock has found its new leader.

Read more »

Man holding a calculator with Australian dollar notes, symbolising dividends.
Technology Shares

$10,000 invested in DroneShield shares 5 years ago is now worth…

You might be laughing all the way to the bank if you had done this.

Read more »

Happy woman working on a laptop.
Technology Shares

Up 60% since April, why this $40 billion ASX 200 tech stock remains a 'compelling buy' today

A leading expert believes this $40 billion ASX 200 tech stock has a lengthy growth runway ahead of it yet.

Read more »

A man holds his head in his hands, despairing at the bad result he's reading on his computer.
Technology Shares

DroneShield shares sink 7% despite big news

Let's see what's going on with this market darling on Thursday.

Read more »