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Can TPG’s merger with Vodafone revive its fortunes?

The TPG Telecom Ltd (ASX: TPM) and Hutchison Telecommunications (Aus) Ltd (ASX: HTA) share prices surged last week after the Federal Court overturned the ACCC’s decision to block the proposed merger between telco companies Vodafone Australia and TPG.

The TPG share price was up by 11.5% by the close of trade on Thursday after the announcement was made, but was down by 1.1% on Friday, while Hutchison, which has a 50% interest in Vodafone Hutchison Australia Pty Limited (VHA), closed on Friday up 8.8% for the last two days of trading for the week.

TPG announced its intentions to merge with Vodafone Australia back in August 2018, however the ACCC decided in a later ruling in May 2019 it would be too detrimental to competition to allow them to merge. Now that the ruling has been overturned, the merger is expected to be completed next year.

TPG and Vodafone have been struggling on their own

I believe that the new entity will now in a much strong position to compete with the 2 current largest telcos in Australia, Telstra Corporation Ltd (ASX: TLS) and Optus, in both the fixed broadband and mobile segments of the market.

On its own, TPG was unlikely to be strong enough to provide sustainable long-term competition to Optus and Telstra in the fixed broadband markets. These markets have become a very cut-throat environment due to the high wholesale prices charged by NBN Co, and the tight operation margins that fixed broadband operators such as TPG must contend with.

TPG has been struggling over the past few years. In its most recent financial results for the full year ending July 2019, TPG saw a decline in overall revenues, earnings before interest, tax, depreciation and amortisation (EBITDA) and net profit after tax. Underlying EBITDA for FY2019 came in at $818.4 million, down from $826.7 million in FY2018.

TPG-Vodafone now a stronger threat

I believe that TPG is now much better placed to grow revenues and profitability over the next few years.

The extra scale will place the newly merged TPG-Vodafone in a much stronger position to compete against Optus and Telstra and reap better margins and therefore higher profits. In addition, the new entity will be well placed to provide new consumer product offerings such as bundled packages, which may well translate to higher market share and therefore higher revenues, boosting the overall bottom line.

Also, in the mobile telco segment, I believe the merged entity will be in a much stronger position to roll out a competitive 5G offering, driven by Vodafone’s current network. I don’t feel that the Australian market is large enough to support 4 independent mobile networks and the costs associated with maintaining them, especially considering Australia’s sparsely populated areas.

Foolish takeaway

A lot will depend on how successfully the merger is executed. However, I am fairly confident that this will be done without too many issues, potentially leading to strong revenues, profitability and share price growth for the merged entity over the next few years.

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Motley Fool contributor Phil Harpur owns shares of Telstra Limited. 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.

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