ACCC questions TPG merger
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It took a few sentences from the ACCC to send TPG's share price plunging 15% this morning. The competition regulator gave its initial views on the merger with Vodafone and suggested it could lead to a lessening of competition.
That simple statement imperils the merger and sent Telstra stock down more than 4% as well.
The statement issued by the ACCC isn't a ruling, just an early opinion, but it does suggest that the TPG merger with Vodafone may not be waived through the way many would have expected.
In our view, it would be a mistake to block the merger. Telstra has 50% of the Australian mobile market and has been generating world-beating returns for years. The merger between TPG and Vodafone brings the first serious challenge to Telstra's supremacy in mobile and would likely lead to stronger competition and lower prices.
It is true that TPG's intention to set up a fourth network would have provided intense short-term price competition, but no-one believes Australia can support four networks. Over time, it would have simply led to poorer services and, perhaps, the death of Vodafone Australia.
There is still a long path to a final decision and we ultimately expect that the merger will proceed, but the risks have gone up a notch and we're lowering our buy price slightly from $6.50 to $6. TPG remains a HOLD.
Telstra's share price is now below our Sell price and, accordingly, we're upgrading to HOLD.
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