Is the TPG Telecom Ltd (ASX: TPM) share price a buy before the merger decision is announced?
As you may know, TPG is in the process of trying to merge with Vodafone Australia so that they can combine forces to take on Telstra Corporation Ltd (ASX: TLS) and Optus.
It has been almost a year and a half since TPG first announced that it wanted to join with Vodafone Australia, but the ACCC decided it would be too detrimental to competition to allow them to merge. The thinking is that as a separate business, TPG must rollout its own mobile network to remain competitive in the future and telco customers would be better off for there to be four large players rather than three.
TPG said that it won’t do its own mobile network, particularly because the federal government blocked it from using equipment provided by Chinese company Huawei which meant all the money and time spent on that partnership had essentially been wasted.
Many market commentators now think that the decision will go TPG’s way. Is the share price a buy in that case?
Well, after the merger plan was announced the TPG share price rose to around $8.60. Assuming investors are still as excited by the idea it could mean upside of over 20% for the TPG share price if the merger is approved. Plus, the merger is expected to lead to stronger earnings and high dividends from the combined business.
There’s a fair chance that the ACCC decision will be reversed, however it’s a flip of the coin.
If the decision goes against TPG then it’s stuck with a low-margin NBN business, although it does have a good corporate segment.
TPG is currently trading at 22x FY20’s estimated earnings. Buying today is too much of a roll of the dice for me. Most investing isn’t gambling, but it would be a bit of punt buying today – I’d rather wait until the decision is known one way or the other.
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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. 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.