Could TPG Telecom Ltd’s (ASX:TPM) share price be hit by a profit downgrade?

The TPG Telecom Ltd (ASX: TPM) share price took a hit today on news that the competition watchdog had launched a court action against the telco for misleading customers.

An adverse ruling could see millions wiped off TPG’s bottom line as management prepares to front investors at tomorrow’s annual general meeting, which could see a board spill.

The TPG share price slumped 2.7% on Tuesday to $7.35 even as its peers benefitted from safe haven buying during a volatile trading session that saw the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index fall 1%.

The Telstra Corporation Ltd (ASX: TLS) share price gained 1% to $3.01 while fellow telecom services group Vocus Group Ltd (ASX: VOC) added 0.3% to $3.50.

Legal Trouble

The Australian Competition and Consumer Commission (ACCC) is taking TPG to the federal court as it believes the company has illegally pocketed millions from mobile customers who paid a $20 “prepayment” fee.

TPG had allegedly advertised that this fee was used to cover unexpected costs, such calls to premium numbers and overseas calls.

However, the ACCC believes that TPG does not refund customers this fee and that the company had buried the disclosure about this fact in fine print.

Further, the competition regulator will allege that TPG automatically topped-up prepaid accounts whenever the balance on the account fell to $10 or less. This in effect means customers can never use the last $10 on their account and that this money would not be refunded when a customer cancels the service.

Another Threat to Earnings

“Since March 2013, the ACCC estimates that TPG is likely to have retained millions of dollars paid by consumers in prepayments that were forfeited,” said ACCC Deputy Chair Delia Rickard.

The ACCC alleges that TPG’s representations to customers about the forfeiture and automatic “top-up” function are misleading and that TPG’s standard contract term requiring forfeiture of the prepayment is unfair under the Australian Consumer Law.

TPG could end up paying more than the profit it reaped from these practices as the ACCC is seeking penalties as well as compensation for consumers.

TPG’s board is already under pressure as it could get a second strike on its remuneration report, according to the Australia Financial Review.

A second strike could lead to a board spill, which does little to build confidence as the telco is facing several challenges, including an earnings squeeze from the NBN.

Motley Fool contributor Brendon Lau owns shares of Telstra Limited, TPG Telecom Limited, and Vocus Communications Limited. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended 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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