Company Reports

Just eight months after giving up on a regional mobile network-sharing arrangement with Telstra, TPG Telecom has hooked up with Optus to do the same. It is the same Optus that demonized the initial TPG-Telstra proposal on competition grounds and convinced the regulator to veto the deal.

TPG Telecom is grappling with structural changes in the Australian telecommunications market. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, hitting its consumer broadband margins.

TPG Telecom is grappling with structural changes in the Australian telecommunications market. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, hitting its consumer broadband margins.

TPG Telecom is dealing with structural changes in the Australian telecommunications market. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins.

The ending of discussions to sell TPG Telecom's non-mobile fiber assets to Vocus is not particularly surprising. We have been circumspect on the prospects of a deal since it was first announced. It was a revelation seemingly only prompted by a media report on Aug. 1, 2023, given the highly conditional and nonbinding nature of the AUD 6.3 billion offer.

TPG Telecom is dealing with structural changes in the Australian telecommunications market. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, impacting its consumer broadband margins.

While the 10% fall in TPG Telecom's 2020 full-year pro forma EBITDA to AUD 1,789 million was just 2% higher than our estimate, it was compositionally a little underwhelming.

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as Internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, crunching its consumer broadband margins.

TPG Telecom is grappling with structural changes in the Australian telecommunications industry. Rollout of the national broadband network, or NBN, and take-up of high-traffic products such as Internet protocol television and video streaming, will increase the demand for broadband and backhaul capacity. However, the NBN will also force TPG Telecom to become a reseller, crunching its consumer broadband margins.

TPG Telecom's ninth consecutive year of record underlying EPS, one that grew 12% in fiscal 2017 to AUD 0.48 and beat our estimate by 8%, is just a mirage in the rear-view mirror. We expect the margin-crunching impact of the National Broadband Network, or NBN, and the competitive intensity it has fostered to manifest in the group's earnings from fiscal 2018. Indeed, the change in industry dynamics is such that TPG rounds out the last of the three major domestic telecoms to rebase its dividends--an especially prudent approach given management's aggressive mobile ambitions.

We put our fair value estimate for TPG Telecom under review.

Hard on the heels of the Vocus-M2 merger announcement and the recent completion of its own AUD 1.4 billion iiNet acquisition, TPG Telecom unveiled yet another deal. It is one that could have far greater long-term implications than the AUD 1 billion face value of the network tie-up, as it deepens the company's relationship with Vodafone Australia. By itself, the two-part deal is a mutually beneficially one. The agreement by TPG to provide dark fibre infrastructure future-proofs Vodafone's network in what is an increasingly capacity-hungry mobile space. It also saves costs by allowing Vodafone to consolidate its various fibre providers to just one.

TPG Telecom, or TPG, reported a strong fiscal 2015 result, with net profit after tax, or NPAT, of AUD 224 million in line with our AUD 221 million forecast. However, management's outlook is guarded, understandably so, considering that the newly merged TPG/iiNet entity has only been in existence for the past few weeks. Despite management's caution, we see several avenues for potential synergies, primarily moving iiNet customers onto TPG's backhaul infrastructure to increase utilisation. TPG will retain the various brands previously held by iiNet and will maintain call centres to ensure that iiNet's high customer service standards are upheld. We agree with management's strategy to maintain the quality of the iiNet brand and resist the temptation to save marketing and call centre dollars through merging two brands. Merging brands will likely usher increased customer churn among existing iiNet customers and we believe this stems from the differing propositions between the two brands, with TPG the price leader and iiNet associated with a 'premium' service, as evidenced by a high net promoter score.

TPG Telecom has finalised its acquisition of iiNet, after the Australian Competition and Consumer Commission decided not to oppose the transaction. Most of the acquisition will be paid via cash, with iiNet shareholders receiving AUD 1.2 billion. TPG Telecom is also issuing 27.5 million shares to iiNet shareholders, which was the maximum level of the share cap. iiNet shareholders will also be entitled to a fully franked special dividend of AUD 0.6914 per iiNet share plus a top-up cash consideration of AUD 0.0586 per share. These payments will total an additional AUD 122 million.

TPG Telecom announced it has made an improved offer to acquire 100% of iiNet's shares, which has been recommended by iiNet's board. Structured as a scheme of arrangement, iiNet shareholders can elect to receive either AUD 8.80 cash or 0.969 TPG Telecom shares for each iiNet share, subject to a 27.5 million share cap. Should the share cap be exceeded, the number of TPG Telecom shares will be scaled back on a pro-rata basis with the balance paid in cash. iiNet shareholders will also be entitled to a fully franked special dividend of AUD 0.75 per share subject to a favourable ruling from the Australian Taxation Office. Should the special dividend be less than AUD 0.75 per share, TPG Telecom will pay the difference in cash. iiNet's Board recommends all iiNet shareholders vote in favour of the revised TPG offer. The total value of the cash offer of AUD 9.55 is similar to M2 Group's bid last month but with the added certainty of a cash alternative, compared with M2's scrip offer. We believe this certainty is integral to the iiNet Board's decision to recommend TPG Telecom's revised offer in favour of the recent M2 offer.

TPG Telecom reported a strong first-half fiscal 2015 result, ahead of both the market's--and our own--expectations. Underlying earnings before interest, tax, depreciation and amortisation, or EBITDA, increased 49% on the previous comparable period, driven by organic growth in consumer broadband and the corporate division benefiting from a full half of the AAPT acquisition.

TPG Telecom has announced a proposal to acquire iiNet. This will be structured as a scheme of arrangement with an expected implementation date in mid July 2015. TPG Telecom will pay AUD 8.60 cash per share, which may be altered if iiNet pays a material fully-franked special dividend on or shortly before the implementation date of the scheme, subject to obtaining a favourable ruling from the Australian Taxation Office. iiNet's board of directors has unanimously recommended the scheme and intend to vote their shares in favour of the proposed scheme, in the absence of a superior proposal. TPG Telecom currently has a 6% stake in iiNet.

TPG Telecom's temporary withdrawal of its new fibre-to-the-basement (FTTB) product from retail sale highlights the potential perils of taking on the government-owned NBN, especially when the federal government also retains the power to set carrier license conditions (CLCs) on industry participants. The government’s CLC, released in mid-December 2014, is likely to cause cost burdens on TPG, and lower the potential returns available from this new network. We're conceptually very upbeat on the potential returns for TPG from this network, given that it could potentially cherry-pick the most profitable customers from the NBN, with a relatively low incremental capital expenditure network. However, with the regulatory situation still very fluid, we are only factoring in limited upside from this project into our forecasts. No material changes to our earnings forecasts. We retain TPG's fair value estimate at AUD 6.50 per share, with the market fairly valuing the company at the current share price. We maintain our narrow economic moat and medium uncertainty ratings.

We have lifted our fair value estimate for narrow moat-rated TPG Telecom by AUD 0.50 per share to AUD 6.50 following an in-line fiscal 2014 result and stronger-than-expected guidance for 2015. TPG Telecom's fiscal 2014 revenue of AUD 971 million was 4.5% ahead of our estimate and earnings before interest, tax, depreciation and amortisation, or EBITDA, of AUD 362 million was 4.2% ahead. Net profit after tax of AUD 171.7 million was 2.9% below our estimate, reflecting higher-than-expected amortisation of the recently acquired AAPT customer base. The company guided to fiscal 2015 EBITDA of AUD 455 to AUD 460 million, which is 6% to 7% above our previous estimate of AUD 428.5 million.

We highlight the potential implications and risks for TPG Telecom ahead of the imminent completion of the Vertigan review. The review is a cost-benefit analysis commissioned by the federal government to consider the structure of the national broadband network, or NBN, and associated regulation. The review will consider competitive implications for the NBN from private-sector investment in fibre-broadband infrastructure.