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Telstra shares: what’s the outlook as the TPG merger case progresses?

We take a look at the potential impact that the TPG-Vodafone merger could have on the Telstra and TPG share prices.

The TPG merger at a glance

The ACCC's rejected TPG-Vodafone merger has created significant volatility and opportunity for the share prices of both Telstra Corp Ltd (ASX: TLS) and TPG Telecom Ltd (ASX: TPM) in recent times.

Indeed, although investors seemed moderately bullish on TPG’s prospects last week as the TPG-Vodafone court case kicked-off, this enthusiasm seems to have moderated in the last couple of trading sessions, as further details emerge about TPG’s business dealings.

By comparison, Telstra (ASX: TLS) looks to have been a benefactor of the stalled TPG-Vodafone merger, as the blue-chip telco strengthens its position in the Australian telecommunications market and rolls out its impressive 5G offering.

Telstra, after all, has seen its share price rise in excess of 30% since January, outperforming the broader ASX 200 benchmark in that period.

With all this considered, analysts have turned to looking at a number of what-if situations, with the central question being:

If the TPG-Vodafone merger goes ahead, what will Australia’s telecommunications sector look like and how exactly will the Telstra and TPG share prices be impacted?

Below we take a look at a number of different potential outcomes.

Telstra share price: winner takes all

The best case:

If the courts uphold the ACCC’s decision to block the TPG-Vodafone merger, Telstra Corp Ltd's position as a leader in Australia’s mobile market would only be entrenched further.

In addition to this, if TPG/Vodafone chooses not to appeal such a decision, Morgan Stanley sees Telstra’s share price running as high as A$4.01.

On today’s stock price, this would imply potential upside to investors of around 12%.

Ultimately, without the merged TPG-Vodafone entity – Telstra would be able to strengthen its dominance in Australia’s mobile market; of which the blue-chip telco already has a strong position in.

In the medium-term, the investment bank argues that this could very well see Telstra’s average revenue per user (ARPU) increase.

The worst case:

By comparison, the worst case for Telstra would be for the courts to approve the TPG-Vodafone merger.

In this possible situation and in Morgan Stanley’s view, this would likely increase market competition in the mobile space – potentially eroding Telstra’s market share as well as the telco’s ability to as easily increase its mobile subscriptions.

In the case that the merger is approved, Morgan Stanley thinks that Telstra’s shares could hit as low as A$3.29.

Regardless of this, as a base case, Morgan Stanley has a 12-month price target of A$3.20 on Telstra (ASX: TLS).

TPG share price: the what if game continues

The best case:

According to Morgan Stanley, the best possible outcome for TPG Telecom Ltd (ASX: TPM) is to have the TPG-Vodafone merger approved.

While an obvious best-case scenario, the investment bank points out that not only would this potentially curtail Telstra’s mobile subscription growth – but by creating a strong third player in Australia’s telecommunications market – TPG-Vodafone would have the potential to effectively grow its mobile market share.

Under these favourable circumstances, Morgan Stanley values TPG shares at A$8.70.

Mind you, if the merger is successful – but appealed – Morgan Staley sees considerably less upside, designating a price target of A$7.82 per share. The reason being that the longer the court case drags on – the more time Telstra has to build out its advantage over the proposed TPG-merged company.

The worst case:

Of course, the potentiality of a successful-but-appealed merger it trumped by TPG simply having the merger rejected.

Morgan Stanley thinks there’s a 30% chance of this outcome – and on this case, sees the TPG share price hitting around A$5.00.

Such an outcome would leave TPG Telecom Ltd without a presence in Australia’s mobile market – besides functioning as a ‘reseller’.

In such a possible world, Telstra Corp Ltd could continue its aggressive T22 expansion almost unimpeded – save for Optus’s own rollout of 5G.

Regardless of this, and as a base case: the broker has an equal-weight rating on TPG (ASX: TPM) and a 12-month price target of A$6.85 per share on the telco.

The investment bank expects the courts to hand down a decision on the merger by October 1.


The information on this page does not contain a record of our trading prices, or an offer of, or solicitation for, a transaction in any financial instrument. IG Bank S.A. accepts no responsibility for any use that may be made of these comments and for any consequences that result. No representation or warranty is given as to the accuracy or completeness of this information. Consequently any person acting on it does so entirely at their own risk. Any research provided does not have regard to the specific investment objectives, financial situation and needs of any specific person who may receive it and as such is considered to be a marketing communication. Although we are not specifically constrained from dealing ahead of our recommendations we do not seek to take advantage of them before they are provided to our clients. See full non-independent research disclaimer.

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