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TPG-Vodafone Merger Won’t Threaten Telstra: JP Morgan

The recently approved TPG-Vodafone merger is unlikely to impact Telstra’s business and won’t inject more competition in the sector, says JP Morgan analyst.

TPG and Vodafone’s $15 billion merger was given the green light from the Federal Court on Thursday, with the news dropping Telstra’s shares to $3.67, down 1.6 per cent.

But according to JP Morgan analyst Eric Pan, the threat posed by the new merged telco is small.

(Photo: Federico Gambarini/dpa)

‘VHA is not interested in growth at the expense of profitability… We expect a combined TPM- VHA to focus on growth initially by cross-selling products to each other’s customer base and offering new products such as fixed wireless broadband, neither of which will encroach on Telstra’s subscriber base,’ he said in a client note.

Pan also said that the combined asset of two of Australia’s biggest telcos won’t give them a competitive advantage, because TPG’s assets, he says, will not improve Vodafone’s network.

‘As the merger brings together a fixed-only and a mobile-only operator, it does not improve the coverage of VHA’s mobile network, which we believe is the only way that VHA can win mobile market share.’

(Photo: JP Morgan)

With the additional spectrum adding more capacity to VHA’s network, Pan says coverage remains the key metric in the mobile sector.

‘TPG- VHA’s balance sheet does not mean increased capacity to invest in the network.’

Pan added that while the combined power of the TPG-Vodafone merger will give the telcos a better-balanced spreadsheet, it is still required to service the $6 billion debt moved to the parent level through dividends, meaning the merger doesn’t free up much additional cash for investment.

It ultimately means the merged telco will have to raise more capital.

‘Without the ability to invest at the same level as Telstra or Optus, VHA will continue to remain a distant third to both in network quality.’

Telstra’s mobile revenue for the first half of FY20 was flat at $5.3 billion, with average revenue per user (ARPU) dropping from $55.62 to $51.52.

The new telco merger now accounts for around 50 per cent of Telstra’s underlying EBITDA and with the growing threat of the TPG-Vodafone merger and its capacity to raise capital, the success of Telstra’s T22 program remains indispensable.

The strategic program, launched last June, is designed to remove costs from the business, revamp its offers to the public amid growing competition, and streamline its workforce.

(AP Photo/Rick Rycroft, File)

Telstra successfully cut its underlying fixed costs by $422 million (12.1 per cent) during the half, with CEO Andrew Penn saying on Thursday there was still more work to do before the T22 is fully delivered.

‘We know that there is more work to do and we still face challenges within our business and across the telecommunications sector, however, our T22 strategy gives us a detailed understanding of what we need to achieve and how we will get there,’ Penn said.

‘Our resolve is to focus on the things that are within our control and it’s particularly pleasing to see a continued strong performance on reducing our costs and delivering new and simplified products and services to our customers.’

Telstra shares ended the session last Friday at $3.77.

Telstra CEO Andy Penn and wife Kallie Blauhorn. 

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