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TPG Telecom Ltd shakes up the telecommunications sector: Here’s what every investor needs to know

TPG Telecom Ltd (ASX: TPM) has bought a 10% stake in smaller rival Amcom Telecommunications Limited (ASX: AMM), taking its total equity interest in the business to 18.6%. According to reports from the Fairfax press, the company paid $2.76 per Amcom share which represents a 2.2% premium to the company’s closing price.

What does this mean?

In an industry ripe with competition, each of Australia’s telco’s have been looking for an edge that will give them the ability to rival the likes of Telstra Corporation Ltd (ASX: TLS).

In a twist that would likely even impress author Steven King, TPG advised that it had no intention to purchase the entire business. Instead, it intends to use its shares to vote against the scheme of arrangement under which Vocus Communications Limited (ASX: VOC) currently plans to purchase the outstanding Amcom shares it doesn’t currently own.

TPG’s decision to acquire a strategic position in Amcom also raises questions as to whether or not the company intends to enter a bidding war for iiNet Limited (ASX: IIN). TPG offered to acquire the business for $1.4 billion in March – a move that would have made it Australia’s second largest broadband provider – but that offer was topped by M2 Group Ltd (ASX: MTU) earlier in the week, which valued iiNet at roughly $1.6 billion. TPG will have until 6 May to enter a counter bid for the company.

What happens to the Amcom and Vocus deal?

The Vocus and Amcom merger was almost set in stone, but TPG’s surprise move has certainly thrown a spanner in the works.

To get the deal over the line, 75% of the voting shareholder base must vote in favour of the merger. Given that Vocus will not be allowed to use its shares to influence the outcome, the vast majority of Amcom’s shareholders will need to submit their approval if it is to have any chance, which seems unlikely given that voting is not compulsory.

This unlikelihood has certainly been reflected by the market’s reaction today. Amcom and Vocus were hammered early in the session, falling by as much as 19.6% and 3.7%, respectively, while TPG’s shares plummeted nearly 6%.

However, Amcom has since stated that it will be referring the recent developments involving TPG to the Australian Competition and Consumer Commission, citing the belief that blocking the Amcom and Vocus deal is not within the best interests of shareholders.

What this means for you

Australia’s telecommunications sector is a high-growth industry and is certainly one investors should consider gaining exposure to. However, given the recent shakeup within the sector, there are also a number of risks which could make share prices quite volatile in the near term. As such, investors may want to hold off from buying until conditions settle down, or otherwise buy into shares progressively (that is, buy in portions rather than in one lump sum), thereby limiting their risk.

Before you buy shares in any of the telcos however, you should know that our lead investment advisor, Scott Phillips, has recently named his hands-down #1 stock pick for 2015. It's an ultra-promising tech stock with a fantastic track record and, more importantly, plenty of room left to run.

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Motley Fool contributor Ryan Newman does not own shares in any of the companies mentioned. You can follow Ryan on Twitter @ASXvalueinvest.

We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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