Are TPG shares a Buy now that the Vodafone merger could be blocked? (original) (raw)

It was always going to happen.

Right at the finish line, out pops the ACCC holding an “anti-competitive” stop sign and it’s back to the drawing board for all. Well… almost. The ACCC announced last week that TPG’s merger deal with Vodafone was now on shaky grounds. The concern is that the deal would be likely to result in a substantial lessening of competition.

Not exactly the sort of thing you want to hear if you’re a TPG shareholder.

As a result shares on the ASX were whacked, falling 19% to $6.30, roughly in line with the pre-bid price. To give you a little background, TPG has done a remarkable job of taking on Telstra (TLS), Optus and Vodafone via its aggressive pricing strategy. It’s now Australia’s fourth mobile network operator and determined to continue with the assault. However the Australia mobile market is concentrated.

With only a few big players, an aggressive competitor such as TPG keeps everyone on their toes. It maintains competitiveness and keeps pricing low. A win-win for the customer. With Vodafone effectively removing TPG from the equation, the aggressive competitor is gone leaving the three incumbents to rule supreme. As a result competition is reduced. Prices rise. Well that’s the ACCC’s theory anyway. They have said “A mobile market with three major players rather than four is likely to lead to higher prices and less innovative plans for mobile customers.”

Of course there are arguments FOR the merger as well. TPG is a minnow in the mobile market with only 3% market share. Compare that to Vodafone’s 19%, Optus’ 29% and Telstra’s 44%. TPG is really just a drop in the ocean and is even attempting to construct its own mobile network in Australia. Will that even make a difference? Should the merger go ahead however, the construction of a 4th mobile network will not be required. That’s a win for customers. Experts say it’s merely impossible for TPG to build a half decent network for just $600m. Vodafone’s network alone cost billions to construct and build.

For investors looking to buy shares in TPG, we think the risk is now to the upside. With the ACCC casting doubt on the deal and spooking the market in the process, shares will continue to track lower until a final decision is made. You know, "markets hate uncertainty" and all that. Well, the stock is in free-fall, but once the dust settles, there could be a good buying opportunity. TPG is currently on a PE of 11x, which is lower than its industry average of 12.1x. At around the $5.50-6.00 mark, the stock is cheap.

Should the merger deal go through, that’s an good 20% in upside potential i.e. the takeover premium, without doing too much work. Should the merger not go through, then TPG will remain the aggressive competitor it currently is. We think any downside share price pressure will be limited and most of this already baked in. The market is already positioning towards a negative outcome. So at worst, if the deal doesn’t go through, TPG shares will trade below their pre-bid level at $6.30 and you pick up a quality stock at a bargain price. You could even switch your broadband and mobile to TPG.

You’ll at least be saving money on your telephone bills. Wining.