CORRECTED-UPDATE 3-Australia blocks Telstra-TPG wireless internet deal, sparking legal fight

(Corrects paragraphs 1 and 3 in Dec. 21 story to make clear TPG is the No.3 wireless internet firm in Australia, and Optus is No.2. Also corrects month to February from May in second paragraph.)

By Byron Kaye

SYDNEY, Dec 21 (Reuters) - Australia's antitrust regulator blocked an asset transfer deal between Telstra and TPG, the country's No.1 and No.3 wireless internet firms, citing competition concerns, setting the scene for a legal battle over access to four million customers.

In a deal announced in February, Telstra Group was to buy spectrum - airwaves which carry wireless internet - and transmission towers from TPG Telecom Ltd, while TPG would keep selling 4G and 5G coverage using what would become Telstra's infrastructure. They did not give financial details.

But No. 2 wireless internet provider Optus, owned by Singapore Telecommunications, opposed the deal saying it would build Telstra's market dominance.

The Australian Competition and Consumer Commission (ACCC) ruled against the plan on Wednesday, saying it would bring "a real risk that TPG and Optus will invest less in critical infrastructure".

Telstra and TPG said they will appeal the ACCC's decision, which they called disappointing and a missed opportunity for the 17% of Australia's 25 million population who would be impacted by the tie-up.

The decision sets up a second legal showdown between TPG and the ACCC in just over two years. The ACCC blocked a buyout by TPG of CK Hutchison Holdings Ltd's Vodafone Hutchison Australia, only for the Federal Court to override it and let the deal go ahead in 2020.

It marks a bright spot for Optus, which faced intense criticism, including from the federal government, after reporting a data breach impacting some 10 million customer accounts in October.

"By knocking back this deal, the ACCC has helped ensure that our regional communities will continue to benefit from competition," said Optus CEO Kelly Bayer Rosmarin in a statement.

Shares of Telstra, which already has the most customers in most of Australia's main internet and telecommunications markets, were flat, while shares of TPG were down 3% by mid-session on Wednesday, against a 1.3% gain on the broader market.

"An unsuccessful appeal to the Australian Competition Tribunal could see a longer term ... impact to our EBITDA forecasts, excluding impact from potentially incremental investment needed to upgrade regional networks," UBS analysts wrote in a client note about TPG.

Paul Budde, an independent telecommunications analyst, said the ACCC decision showed Australian competition regulation was out of step with commercial reality by focusing on infrastructure ownership, not services.

"You could say that the ACCC has failed to start moving into that direction, or you can argue that the industry should have lobbied for an overall review of the telecoms regulation," he said in an email.

"The industry and the ACCC will have to sit down and work out a new regulatory system that takes the reality into account," he added. (Reporting by Navya Mittal and Savyata Mishra in Bengaluru; Editing by Anil D'Silva, Shinjini Ganguli, Uttaresh.V and Muralikumar Anantharaman)