Are Australia’s telcos too dangerous to invest in right now?

It was a transaction that was essentially set in stone, but the proposed merger between Amcom Telecommunications Limited (ASX:AMM) and Vocus Communications Limited (ASX:VOC) is now very much up in the air.

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It was a transaction that was essentially set in stone, but the proposed merger between Amcom Telecommunications Limited (ASX: AMM) and Vocus Communications Limited (ASX: VOC) is now up in the air with the boards agreeing to delay a key shareholder vote until 18 May.

While shareholders were initially set to meet on Wednesday 6 May to vote on the proposed merger, Amcom has released an update advising that the vote would be delayed by nearly a fortnight to allow for more time to convince shareholders to vote in favour of the deal.

The delay comes after TPG Telecom Ltd (ASX: TPM) strategically increased its stake in the smaller telco. In an after-markets transaction, it increased its stake to nearly 18.6% and stated that it had no intention to acquire the whole business, but would instead use its shares to vote against the proposal between Amcom and Vocus.

Although it is still possible for the deal to be approved, TPG’s surprise acquisition has made it far less likely. While Vocus will not be allowed to use its own shares to vote, it is not compulsory for other shareholders to participate, either. As such, Amcom will use the additional 12 days to convince the vast majority of its shareholders to participate in the vote which may just see it get over the line.

What this means for the telecommunications sector

As it stands, the telecommunications industry is dominated by Telstra Corporation Ltd (ASX: TLS) and each of the smaller players are looking for a way to improve their own position so as to not get left behind.

TPG’s decision to block the proposed transaction between Amcom and Vocus comes after its own plans to takeover iiNet Limited (ASX: IIN) were spoiled by M2 Group Ltd (ASX: MTU). While TPG Telecom hoped to become the industry’s second biggest player in terms of broadband subscriptions, that hope has faded somewhat after M2 Group made a superior offer for the iiNet business which, if successful, would see M2 become the second-biggest player in the industry instead.

Although it is unclear whether or not the David Teoh led TPG will make a competing offer for iiNet, its moves on Amcom’s shares may prevent Vocus from becoming another major competitor to contend with, at least in the near-term. The move by TPG could be labelled as ‘selfish’ and Amcom has even stated that it will be referring the case to the Australian Competition and Consumer Commission, citing the belief that blocking the deal would not be within the best interests of shareholders.

Is it time to buy the Telcos?

Although Australia’s telcos offer enormous growth prospects, the recent developments within the sector make it a somewhat risky bet right now. While iiNet appears to be in a great position (with further bids for its shares considered likely), its rivals are facing uncertain times which could make their share prices somewhat volatile in the foreseeable future. As such, investors may want to hold off from buying until conditions settle down, or otherwise buy into the companies progressively so as to limit your downside risk.

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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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