Is Telstra in for a bruising fight with merged TPG-Vodafone?

Now that the merger between TPG Telecom Ltd (ASX: TPM) and Vodafone is just about guaranteed, attention is turning to what that means for Telstra Corporation Ltd (ASX: TLS).

Our third largest mobile phone operator is bulked up and its new chief executive Iñaki Berroeta appears to be spoiling for a fight to win market share from Telstra.

However, the merger may be what the sector needs and may prove to be a positive for shareholders.

Will a new mobile war erupt?

Just don’t tell Berroeta that. He indicated in an interview with the Australian Financial Review that competition will be heating up as he needs to prove that the $15 billion merger was worth all the trouble.

The ACCC tried unsuccessfully to scuttle the marriage by arguing that competition will lessen with only three players in the field compared to four if TPG remained a separate entity.

The courts took TPG’s and Vodafone’s side, so the newlyweds can’t contradict themselves now.

Biggest winners are investors

But if you taught that customers will be the biggest beneficiaries from the new development, you are probably wrong. Investors may benefit more.

This is because the cut-throat pricing tactics used to take market share will probably take a backseat in the new world order for the sector.

“The last four years in Telco can been characterised as a lot of competitive tussle to achieve no meaningful change in market share and lower profits,” said Morgans.

“With the NBN nearing completion, 5G nearing mainstream launch, and TPG / Vodafone set to merge in July, the market is returning to more rational economics, in our view.”

Same war but different tactics

Other experts have said similar things. The new tactic to win market share is through bundling instead of outright price cuts.

UBS believes that the upside for the new TPG-Vodafone group, which should start trading on the ASX on Monday under the code “TPG”, will be from cross-selling of services.

The broker believes only 23% of Vodafone’s customers use a residential broadband service offered under the TPG umbrella and only 45% of TPG’s fixed broadband customers use mobile phone services that’s on the Vodafone network.

So, while competitive pressure will remain to the benefit of consumers, the change in tactics will not hurt margins in the same way as outright price cuts of the past.

Foolish takeaway

That leaves shareholders as the biggest winners, in my view.

And if you are wondering which stocks represent the best value in the telecoms sector, Morgans reckons its TPG and Superloop Ltd (ASX: SUL).

It’s also worth noting that TPG will spin out its Singapore operations into a newly listed company called Tuas. Existing TPG shareholders will get one share in each of the newly formed entities.

More reading

• These are the 4 cheapest ETFs on the ASX
• Why I think Telstra and these ASX dividend shares are strong buys
• Can 5G help push the Telstra share price higher by 2021?
• Australian businesses are running out of cash
• 3 robust ASX dividend shares you need to own

Brendon Lau owns shares of Telstra Limited and TPG Telecom Limited. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. owns shares of SUPERLOOP FPO. 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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