Telstra shares have risen by 13 cents, or just over 4 per cent, since the proposed $15 billion merger of TPG and Vodafone was announced on August 21.
The most obvious reason cited by analysts is the relative reduction in competition the carrier will face in its prime mobile and internet markets with only three major players.
The national carrier has been under continuous pressure in the mobile and internet markets for years thanks to the relatively cheap price of wholesale data for its competitors and their highly aggressive pricing. This in turn has led to Telstra having to offer incentives and price its own packages competitively, which has eaten into its own margins.
The absence of many of those competitors, thanks in part to TPG swallowing some of them, has been a boon for Telstra, which has faced increased competition on all fronts.
The NBN, by way of example, has levelled the broadband playing field and greatly diminished Telstra’s long-held advantage of bringing economies of scale to its market offerings.
However, UBS analyst Eric Choi believes Telstra’s mobile margins will still come under pressure from ongoing aggression from its two remaining serious rivals Optus and the merged TPG/Vodafone entity.
“Optus continues to tactically discount, and TPG has declared it will continue its aggressive mobile launch,” he said in a note to clients.
Continued aggressive pricing from its competitors is forcing Telstra to rethink its short and longer-term mobile offerings to remain on top of one of its most vital markets at a time when it’s going through a huge restructuring involving doing away with a total of 1200 positions, many from its executive ranks.
Choi added that the potential loss of a fourth major player due to the merger did indicate that more rational pricing models would return to the market at some point but that Optus and TPG/Vodafone weren’t showing any immediate signs of curtailing their aggression.
He also said the merged entity had opportunities to complement each other in areas where they had previously been weak.
“Our base case assumes the merged TPG competes aggressively but intelligently — in enterprise where Vodafone has a smaller mobile back book, and via a differentiated TPG mobile brand in consumer. Additionally, we expect Vodafone to ramp its base management capabilities to cross-sell across the Vodafone mobile/TPG fixed bases.”
Telstra shares were down 1 cent to $3.17 in early morning trading.
