In morning trade the TPG Telecom Ltd (ASX: TPM) share price has crashed lower after the ACCC expressed preliminary competition concerns about its proposed merger with Vodafone Hutchison Australia.
At the time of writing the TPG Telecom share price is down 18% to $6.35 and the Hutchison Telecommunications (Aus) Ltd (ASX: HTA) share price is off 36% to 9 cents.
What did the ACCC say?
According to the ACCC release, the competition watchdog's chair, Rod Sims, believes that removing TPG Telecom as a new independent competitor would substantially lessen competition.
Mr Sims said: "Our preliminary view is that TPG is currently on track to become the fourth mobile network operator in Australia, and as such it's likely to be an aggressive competitor."
"We therefore have preliminary concerns that removing TPG as a new independent competitor with its own network, in what is a concentrated market for mobile services, would be likely to result in a substantial lessening of competition. If TPG remains separate from Vodafone, it appears likely to need to continue to adopt an aggressive pricing strategy, offering cheap mobile plans with large data allowances."
Mr Sims believes that the merged TPG-Vodafone would not be incentivised to operate in this way and competition in the market would be reduced.
As such, the ACCC fears that a mobile market "with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers."
In addition to this, the ACCC intends to closely examine the likely impact of removing Vodafone as a competitor in the fixed broadband market.
Mr Sims explained that: "Although Vodafone is currently a relatively minor player in fixed broadband, we consider it may become an increasingly effective competitor because of its high level of brand recognition and existing retail mobile customer base."
And finally, the ACCC will also consider the longer-term impact of the proposed merger, given its view that there is likely to be an increased take-up of mobile broadband services in place of fixed home broadband services after the roll out of 5G technology.
What now?
The ACCC has invited submissions from interested parties on the Statement of Issues by January 18 2019, after which it expects to make a final decision on the merger by March 28 2019.
TPG Telecom has acknowledged the ACCC's statement of issues and advised that it "remains confident that the necessary regulatory approvals and other conditions precedent can be completed to enable completion of the merger in the first half of 2019." Vodafone has echoed this statement as well.
Should you invest?
I think the ACCC's concerns are a bit of a blow for TPG Telecom, Vodafone, and also Telstra Corporation Ltd (ASX: TLS).
As the competition watchdog noted, the market expected the merger to result in lower competition and stronger margins for these telco giants. But with the merger looking a lot less certain now, these margin pressures could remain in place for the foreseeable future.
In light of this, I would suggest investors stay clear of the sector until the ACCC decision is made in March.
