At time of writing, the share price of Telstra Corporation Ltd [ASX:TLS] is up 0.59%, trading at $3.42
After a strong surge from the start of the year, the Telstra share price has shed nearly 15% since it hit a 52-week high on 9 August:
We unpack what’s been going on with Telstra over the last two months, the impact of the TPG-Vodafone merger and our outlook for the company.
TPG-Vodafone merger could be back on — and that may be impacting the Telstra share price
It’s one of the most important court cases in Australia, and Telstra and TPG Investors are watching proceedings closely.
At stake is a potential $15 billion merger between TPG and Vodafone Australia, which the ACCC has previously blocked.
TPG and Vodafone are arguing that the merger would actually increase competition in the telco industry rather than limit it.
The case looks set to continue until at least the end of the year, but could extend through to February 2020.
Without wading too far into the case, recent developments point to the possibility that ACCC’s decision could be overturned by Justice Middleton.
Some background first…
TPG was planning on rolling out a 4G network with Huawei being their preferred supplier.
But when the Federal government banned Huawei from Australia’s 5G network, TPG pulled the plug on the move.
In closing statements delivered on Monday, the Sydney Morning Herald reports that Vodafone’s counsel Peter Brereton, SC said the following:
‘Indeed, on the Commission’s evidence, TPG dodged a bullet that the network that they were rolling out would have been one of the great white elephants of Australian telecommunications history.’
Here’s the upshot of all of this…
The market seems to be indicating at the moment that TPG and Vodafone’s lawyers are onto something.
That is, the recent downturn in the Telstra share price could be signalling that the merger would indeed increase competition.
And it is also interesting to note that after the ACCC announced that it opposed the merger on 8 May, Telstra shares had 12 winning sessions.
Our outlook for the TLS share price…
Competition is clearly on the minds of Telstra chiefs — and a positive outcome for TPG and Vodafone could drag the share price down further.
We note that the word was dropped 11 times during the transcript of the recent FY2019 results analyst briefing.
One of the analysts, Brian Han of Morningstar, may have had the most pertinent question of the briefing.
He asked the Telstra CEO Andrew Penn:
‘Do you think Telstra’s mobile and coverage still warrants the kind of 15- 20% price premium to competition, or are you prepared to flex that to maybe compete even harder for customers if need be?’
So Telstra due to its size and its strong network can get away charging significantly more for its mobile users.
Turns out size does matter in the telco world, and its advantage could increase as the 5G network rolls out…
In turn, this could strengthen the case for a bigger entity to challenge the potential Optus/Telstra duopoly.
Looking down the track to February of next year, it would then not be a massive surprise to see the TPG/ Vodafone merger go through and the Telstra share price to take a hit.
Recent movements in the Telstra share price seem to be indicating this.
As a result, our outlook for Telstra is largely negative.
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