TPG-Huawei Fallout Sparks Telstra Rally

By Glenn Dyer | More Articles by Glenn Dyer

Oddly, TPG Telecom created a win-win situation yesterday with its announcement that it was not going to roll out the country’s 4th mobile phone network.

In the wake of the announcement Telstra shares were suddenly hot – not in a negative ‘sell, sell, sell’ sense, but in a ‘get on and go long’ sense.

As a result, Telstra shares rose more than 7.7% back past $3 to end at $3.19, a three month plus high after TPG’s announcement.

In fact, Telstra was the best performing stock on the ASX 200 yesterday, a rare occurrence

Investors saw it as the winner of TPG’s decision because there will be one less mobile network to monster Telstra’s core business – its mobile operation.

But TPG investors also won.

TPG’s shares closed at $6.96 on Friday and yesterday to $7.35 after the statement, then dropped to $6.60 just before 11am.

They recovered and were up 3% to $7.15 at the close as investors realised the TPG announcement had probably cleared any competition concerns the ACCC had about the Vodafone deal – and wouldn’t be spending close to $2 billion dollars on a new mobile network.

TPG executive chairman David Teoh blamed the federal government ban on Chinese company Huawei for the decision to abandon the ultra-fast 5G mobile network that was due to start later this year or in early 2020.

In an announcement to the Australian Stock Exchange on Tuesday, TPG said the principal vendor selected for use in the small-cell network was Huawei and the government’s decision to ban Chinese providers from supplying 5G networks has meant it “does not make commercial sense” to continue.

“A key reason for the selection of the vendor and the design of TPG’s network was that there was a simple upgrade path to 5G, using Huawei equipment,” TPG’s announcement said.

“In light of the Government’s announcement in late August 2018 that it would prohibit the use of Huawei equipment in 5G networks, that upgrade path has now been blocked.”

TPG had been installing Huawei equipment since announcing the launch of the country’s fourth network in April 2017.

There has been rising speculation in recent weeks about TPG’s plans especially with the competition regulator, the ACCC voicing concerns about the impact on competition in mobile from TPG and Vodafone merging.

Now there won’t shouldn’t be the same competition concerns if the Vodafone deal goes ahead.

Now they will be all about the impact on competition levels generally from reducing the number of major mobile groups from four to three – with the number of networks unchanged at three.

The federal government banned suppliers like Huawei in August from participating in 5G on security grounds. Huawei is the world’s largest telco equipment manufacturer and it has also been banned in the US, UK, NZ, Canada.

The US Justice Department on Monday accused Huawei’s chief financial officer Sabrina Meng Wanzhou and the company of bank and wire fraud and conspiring to steal trade secrets.

Since Canberra revealed the ban, TPG said it had continued to roll out equipment ordered from Huawei beforehand but had since reached a point where further orders needed to be decided on.

While TPG had explored if there were any other “solutions available to address the problem created by the Huawei ban” it decided it was not commercially viable to further invest shareholder funds in a network that couldn’t be upgraded to 5G.

To date, TPG says it has invested $100 million in capital expenditure with another $30 million committed in rolling out a mobile network. Equipment had been bought for 1500 sites with 900 small cells completely or partially completed.

Mr. Teoh said in his statement yesterday that it was “extremely disappointing that the clear strategy the company had to become a mobile network operator at the forefront of 5G has been undone by factors outside of TPG’s control”.

“Over the past two years a huge amount of time and resource has been invested in creating and delivering on a strategy that would have positioned TPG very favourably to exploit the opportunities that the advent of 5G will present,” he said.

“While TPG remains committed to the planned merger with Vodafone Hutchison Australia, the Company must continue to make independent business decisions in the best interests of TPG shareholders pending the outcome of the merger process.”

TPG does not expect a write down or any impact on fiscal 2019 guidance. TPG would not comment on its plans for its spectrum holdings.

Glenn Dyer

About Glenn Dyer

Glenn Dyer has been a finance journalist and TV producer for more than 40 years. He has worked at Maxwell Newton Publications, Queensland Newspapers, AAP, The Australian Financial Review, The Nine Network and Crikey.

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