No other person is more respected by his competitors than TPG Telecom (ASX: TPM) founder and Chairman David Teoh.
Having become a billionaire from building TPG into one of Australia’s dominant telecommunications companies, in April 2017 Teoh announced that TPG would begin building its own mobile network, the fourth in Australia.
Ever since, Australia’s three existing mobile network owners – Telstra (ASX: TLS), Optus (owned by Singtel) and Vodafone Australia (50% owned by Hutchison Australia (ASX: HTA) – have been hunkering down for a long and costly fight against an aggressive competitor.
Following Amazon founder Jeff Bezos’s dictum that “Your margin is my opportunity”, Teoh has a well-deserved reputation for running a tight ship while positioning TPG as the low-cost competitor in the markets in which it operates.
The company intends to pursue a similar strategy once its Australian mobile network is built. The result is likely to be lower margins and profits for the existing three mobile network owners as they fight with TPG for customers and market share.
“Merger of equals”
But today TPG and Vodafone Australia confirmed they were exploring a “merger of equals”.
The respect in which Teoh is held by his competitors – and their investors – can be seen in the share price reactions to the announcement.
While no deal has been confirmed, the prospect of there remaining three rather than four mobile network owners in Australia meant Telstra shares rose 7%, to $3.21.
Even before TPG’s entry, Telstra was already facing increased competition due to a more aggressive Optus and Vodafone, who have invested billions improving their networks in recent years.
So the prospect of having two rather than three well-financed competitors has come as a relief to its long-suffering shareholders.
Meanwhile, Hutchison Australia shares have risen 52%, to $0.091, while TPG’s share price also exploded upwards, rising 22% to $7.65 at the close of trading.
For its part, TPG investors weren’t exactly happy with the large investment required to create Australia’s fourth mobile network: TPG estimates it will cost around $1.9bn to build the network and acquire the necessary spectrum.
And many investors are sceptical that the network itself will cost “only” $600m to build, while it is likely to be many years before TPG’s mobile network becomes profitable.
So combining TPG and Vodafone makes a lot of sense.
Should it go ahead, the “merger of equals” would combine TPG’s largely fixed broadband business with Vodafone Australia’s largely mobile business.
In such a scenario, TPG won’t have to build a duplicate mobile network while simultaneously fighting with competitors for scarce spectrum, and fewer competitors will also likely increase the profitability of the combined group.
Of course, there’s likely to be a lot of negotiating before any deal eventuates, assuming one ever does.
Whatever happens, though, I’d back Teoh over his competitors any day.