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Telstra Corporation Ltd (ASX:TLS) shares are storming higher

It certainly has been a day to remember for Telstra Corporation Ltd (ASX: TLS) shareholders.

The telco giant’s shares finished the day a whopping 7% higher at $3.27 on Wednesday. This gain brought its shares to their highest level in over three months.

Why did Telstra’s shares storm higher?

The market appears to have responded positively to news that TPG Telecom Ltd (ASX: TPM) is looking into merging with Vodafone Australia.

For those that are unaware, the TPG Telecom share price rocketed 22% higher today after confirming that it has engaged in “exploratory discussions with Vodafone Hutchison Australia Pty Ltd (VHA) regarding a potential merger of equals of the two companies.”

Vodafone also confirmed the discussions, stating that: “it has commenced discussions with TPG in relation to a potential combination of the two highly-complementary companies. At this stage, these are exploratory non-binding discussions, with no commitment from VHA or its shareholders.”

The latter part of the statement was echoed by TPG Telecom, warning that there is “no certainty that any transaction will eventuate or what the terms of a transaction would be.”

Judging by the positive reaction from the shares of Telstra, TPG Telecom, Vocus Group Ltd (ASX: VOC), and Hutchison Telecommunications (Aus) Ltd (ASX: HTA), which is up a staggering 52%, the market has ignored these warnings and is seeing it as a done deal.

But why will Telstra benefit?

If TPG Telecom and Vodafone do merge, it will mean a third major player in the Australian market along with Telstra and Optus.

I suspect that the market is predicting that this will bring an end to the price war that has weighed heavily on each of these telco companies’ margins in recent times.

If this proves to be the case, then Telstra might well be able to sustain its dividend at a much higher than expected level in the coming years.

But it is still early days and I would suggest investors remain cautious.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. 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 Scott Phillips.

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