By Tom Westbrook and Colin Packham
SYDNEY (Reuters) - Australia's TPG Telecom Ltd said on Tuesday it has abandoned building its mobile telephone network because it relied on Huawei Technologies Co Ltd equipment that has been banned by Australia's government on security grounds.
The nascent network is the first commercial casualty in Australia of the ban announced in August and comes as Western nations restrict market access to Huawei over allegations that China could use its equipment for espionage. Huawei denies the allegations.
The world's biggest telecoms equipment maker has been under siege since the arrest of its chief financial officer, Meng Wanzhou, in Canada in December. The U.S. Justice Department accused the company on Monday of bank fraud and conspiring to steal trade secrets from T-Mobile US Inc.
Broadband internet provider TPG said in a statement it chose Huawei as a supplier because it offered a simple upgrade path from the fourth-generation (4G) network under construction to 5G. "That upgrade path has now been blocked," TPG said. "It does not make commercial sense to invest further shareholder funds."
TPG said it made the decision now because the project had reached a point where it would have had to place new orders. It did not elaborate on the fate of the completed part of the network but said it does not expect any impact on 2019 earnings guidance.
Huawei said TPG's announcement was "extremely disappointing".
"Australians will now miss out on cheaper and more affordable mobile services," Jeremy Mitchell, a spokesman for the Chinese firm, said in an emailed statement.
TPG shares touched a six-week peak following its announcement and closed up 3 percent. The cancellation has cost it A$100 million ($72 million) but is widely seen as eliminating duplication under the A$15 billion merger it has agreed with the Australian arm of Britain's Vodafone Group PLC.
TPG's announcement also buoyed shares elsewhere in the sector, with those of Telstra Corp Ltd rising 8 percent to a more than three-month high as investors expected relief from profit-margin pressure in the price-competitive sector. The broader market closed down 0.5 percent.
"You take one network out and then, obviously, in the end, for customers you've got less choice," said independent telecoms analyst Paul Budde. "This will be a relief for Telstra and others."
TPG agreed its merger with Vodafone in August to challenge larger rivals Telstra and Optus, owned by Singapore Telecommunications Ltd.
The tie-up combines Australia's third- and fourth-largest telecoms firms into a larger third player holding TPG's fibre network and Vodafone's mobile system, at a time of upheaval in the sector caused by the introduction of a government-owned broadband network.
Both parties said they remained committed to the deal on Tuesday, though it is yet to receive approval from the Australian Competition and Consumer Commission (ACCC). Macquarie analysts said TPG halting network construction would "reframe" the regulator's assessment of the deal, which so far been predicated on the tie-up reducing mobile rivalry.
"The ACCC will need to assess the extent to which this decision by TPG changes its counter-factual analysis with regard to mobile competition," the analysts said in a note to clients.
ACCC Chairman Rod Sims said by phone that decisions taken during a merger assessment process would be rigorously tested.
"We're taking a long-term view here...does the merger substantially lessen competition in terms of what would have happened without the merger?," Sims said.
TPG's move adds to pressure Huawei is facing globally after the United States and its allies initiated measures to restrict market access for the Chinese firm and compatriot ZTE Corp, citing espionage risk.
Australia's intelligence agencies feared that if mobile operators use Huawei's equipment, the company could develop a means of collecting data at the request of China's government - something the company has repeatedly denied.
Operators in Europe such as BT and Orange, have already removed Huawei's equipment or taken steps to limit its future use while Vodafone has paused its use.
In Australia, Vodafone and Optus, which use Huawei's 4G equipment must now design 5G systems based only on Nokia Oyj or Ericsson technology, a process TPG Executive Chairman David Teoh said would likely be costly.
"In the 5G side, they're in front of everyone else," Teoh said of Huawei in an interview at TPG's Sydney headquarters.
"To replace (them) there are few vendors to select."
($1 = 1.3955 Australian dollars)
(Reporting by Tom Westbrook and Colin Packham in SYDNEY; Additional reporting by Aby Jose Koilparambil in BENGALURU; Editing by Richard Pullin and Christopher Cushing)