TPG Telecom surged more than 21% yesterday to two-year highs as it said it was talking to rival telco, Vodafone about a possible merger.
The merger, if it happens could see a company with a value of more than $12 billion created, perhaps more with debt is included.
The reason is the intense competition, rising costs for new infrastructure, especially the 5G mobile networks that are coming from 2019-20 onwards and the pressures being created by the NBN.
Optus yesterday revealed plans to introduce more automation and artificial intelligence into its processes to cut costs, and also announced it was cutting 400 staff.
The reason for all of this is the pressures the rollout of the NBN are causing for the entire sector and in the mobile segment where everyone is attacking Telstra and Telstra is fighting back.
If the TPG merger happens the deal will see the country’s third (Vodafone) and 4th (TPG) largest telcos join up – a move that could carry competition issues. A 7% jump in Telstra’s share price yesterday tells us that investors see it as a winner.
TPG shares ended at $21.65, the highest they have been since September 2016 when the company started issuing downgrades as the impact of the NBN, intense competition and its decision to build its own mobile network hit investor confidence.
Shares in Hutchison Telecommunications Australia – the thinly traded ASX-listed joint venture partner with Vodafone – were also higher – up 51% to 9 cents.
Shares in Telstra though rose more than 7% to $3.27, continuing the improvement since last Thursday’s results. The shares are now up more than 13% in the past week and Telstra’s value is now over $38 billion.
At that level TPG was valued at just over $7 billion. The merger talks have the greenlight from the company’s main shareholder, Washington H. Soul Pattinson.
TPG’s confirmation of media speculation that it is in talks with Vodafone Australia about a potential merger of the two telco companies was the latest rumour to swirl about a deal between the two companies here, or in NZ where there was talk about a deal in that country last year.
Vodafone NZ tried to merge with Pay TV operator, Sky, but that was rejected by NZ competition regulators. In a statement to the ASX on Wednesday, TPG said it has held exploratory discussions with Vodafone regarding a "merger of equals" between the competing companies.
"The TPG Board notes that there is no certainty that any transaction will eventuate or what the terms of a transaction would be," the statement said.
TPG provides broadband services under its own name as well the iiNet and Internode brands, is currently spending $1.9 billion on building a fourth mobile network for Australia. It is due to come on stream next year.
Vodafone is Australia’s third-biggest telco by subscriber numbers, after Telstra and Optus.
TPG reported a fall in profit at its first-half results in March as subscriber numbers fell.
Telco sector players such as Telstra, Optus, Vodafone, TPG and others have had their margins cut by the rollout of the NBN and competition in the Australian broadband and mobile markets.