A bigger fish in the telco pond

Published in the Daily Telegraph, July 2015 by Dale Gillham

Shareholders of TPG Telecom and iiNet have a right to be a little concerned about the close look the Australian Competition and Consumer Commission is taking at the former’s proposed takeover of iiNet, and whether the move would substantially lessen competition in the telco sector and put consumers at a disadvantage.

However, is this the only issue to be concerned about?

Firstly, TPG is a multimedia full service telecommunications company. iiNet is an internet service provider, supporting broadband, telephony and mobile services.

Currently, there are five major players in the industry, including these two, Telstra, Optus, and M2. Therefore, the takeover of iiNet would reduce the number of players to four.

Competition issues in Australia are taken very seriously by the ACCC and there can be major ramifications to consider when allowing one fish to swallow another, essentially creating a bigger fish in the same pond.

The ACCC is exploring the impact of the takeover on pricing, innovation and service quality, and this it must do to properly carry out its job, which is to protect consumer interests and ensure a competitive marketplace.

Therefore, shareholders need to be patient and wait for the process to take its course.

Some consumers believe customer service levels will decline at iiNet if the takeover is allowed to proceed.

However, for this to occur it would mean that the whole philosophy behind the company would have to change.

This is unlikely, particularly as TPG’s plan, post the takeover, is that iiNet’s brand and therefore philosophy around its relationship with consumers will be retained.

But there is another side to all of this. What is the true cost of greater competition?

Over the years that I have been managing direct equity accounts I have seen a number of good Australian companies struggle to grow through acquisition, in their own backyard, due to “competition issues” that held them back.

Growth by acquisition is typically the fastest way a company can grow market share.

But it seems some Australian companies have a much harder time growing their businesses this way than foreign companies, who seem to overcome hurdles with takeovers.

So how do Australian companies compete and develop a strong presence in their own pond when we don’t seem to have the mechanism to support their growth?

In this case, I believe it is unlikely the ACCC will rule against TPG.

However, if it did it will be yet another example to me of a flaw in the system, not with the ACCC, but in the way Australia manages our home-grown industries.

To give you an idea of the size of our telcos, let’s look at their market capitalisation.

Currently TPG is valued at about $7 billion and iiNet at about $1.55 billion — but Telstra is about $75 billion.

So, isn’t there room for another Australian telco to grow?

One final point. Our dollar is in decline, so this means that opportunities are ripe, as the dollar falls, for the much bigger fish from much bigger ponds, to come into our market and swallow up Australian companies, and then the profits go offshore.

So who really wins?

In the short term maybe the consumer, but there will be less money coming back into our economy.

So aren’t the much broader issues worth considering?

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