The Motley Fool

The telco sector is on fire

Investor positivity has suddenly come storming back for investors after the recent potential merger between TPG Telecom Ltd (ASX: TPM) and (Vodafone) Hutchison Telecommunications (Aus) Ltd (ASX: HTA).

Just today, TPG Telecom’s share price is up 9.2% and Hutchison Telecommunications’ share price has risen 54%!

Since the start of the week Hutchison Telecommunication is up 133% and TPG is up 38.5%.

How about that for boring, utility, slow-growth businesses?

The deal makes a lot of sense, particularly for TPG. The telco was planning on investing vast amounts of capital to create its own mobile network. Both telcos would have to invest heavily to build the next generation 5G network.

The two businesses combined will only have to build one network. This alone I’m sure will save hundreds of millions, if not billions, over time. There are also substantial legacy assets that can create savings or synergies for a combined business. Such as (sadly) job reductions, systems and technology.

The TPG Board confirmed yesterday that there is no certainty that any transaction will take place, or what the terms would be. However, investors seem keen to get in on the potential.

This deal could also mean the end of bitter price wars between mobile giants. TPG was promising to come in with rock-bottom prices to try to win market share.

Telstra Corporation Ltd (ASX: TLS) shares are up 3.5% today, 10% since the start of the week and 22% over the past month. The telco giant would be a major beneficiary from the end of price wars, as it has been improving value for customers in recent times to maintain market, but this costs revenue.

The troubles of the NBN aren’t going away but there may now be a lot less potential downside in earnings for the telco industry, at least on the mobile side of things.

However, the rapid rise of the share prices means a lot of the near-term benefits are now priced in. I would think carefully about buying at today’s prices.

Instead, I think this top growth share would be a much better pick for your portfolio.

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Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited and TPG Telecom 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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