TPG Telecom's aspirations to become Australia's fourth mobile provider could cost more than $1.5 billion and the David Teoh run company would need solid market share to create shareholder value.
Investment bank UBS, initiating its coverage of TPG with a neutral rating, believed the catalyst to launch the telco into the mobile market would be April's 700MHz auction. Last year, the government rejected a proposal from Vodafone to buy leftover 700MHz spectrum, instead favouring an auction that could reap between $500 million and $1 billion.
"TPG already owns spectrum in the 1800 MHz and 2500 MHz bands, which would complement any 700 MHz spectrum potentially purchased," UBS analyst Tom Beadle said.
TPG already had an agreement with Vodafone Hutchison Australia to roll out about 4000 kilometres of fibre to more than 3000 Vodafone sites, Mr Beadle said, which Vodafone would lease for 15 years. It already leased 900 kilometres of fibre from TPG.
"This infrastructure could also help provide the backbone for TPG's own mobile network," he said. Related Quotes
View all announcements Mr Teoh had made clear he wanted the company to build its own mobile network – it won a bid to become Singapore's fourth mobile provider and would begin building this year – but lamented to difficultly in acquiring tower space.
Mr Beadle said a metropolitan city focused rollout could cost TPG upwards of $1.5 billion. The cost would depend on how much spectrum TPG acquired, how much it built versus how much it leased or roamed on other networks.
He said an upper cost scenario could be closer to $3 billion, the estimated cost of Hutchison's network, built in the early 2000s.
UBS estimated TPG would need to secure a mobile market share of between 5 per cent and 6 per cent to break even, and between 8 per cent and 10 per cent to create shareholder value.
The bank reckoned if Mr Teoh could get the cost of building the network down by $300 million to $1.2 billion, it could fund the entire build through its balance sheet and not need to raise additional equity.
Mr Beadle believed it was more likely TPG built its own network than buy or merge with Vodafone, which had been speculated over the years.
"Strategically it would likely make sense, given TPG and Vodafone's relative strengths and the fact that both companies are already working together," he said, noting Vodafone's ownership structure – a 50-50 joint-venture between Vodafone and Hutchison Telecommunications – and Vodafone's debt as major pitfalls to any deal.
TPG was laying the foundations to boost profits and mitigate shrinking margins as Australia's internet users shifted to the national broadband network.
"Price leadership has historically driven TPG's broadband subscriber growth, while cost leadership has driven industry-leading margins," Mr Beadle said. "However, in an NBN environment, while we believe TPG can continue to grow subscriber share, we believe increasing competition and lower capital intensity will drive margins lower."
TPG was building its own fibre-to-the-basement network, competing directly with NBN in covering 500,000 apartments and businesses in highly profitable metropolitan areas.
TPG had previously stated its FTTB product was more profitable than its DSL business, so it was focusing a lot of attention on signing up customers on that network, which could deliver a margin boost.
UBS was forecasting TPG's earnings before interest, tax, depreciation and amortisation to grow from $775 million in the 2016 financial year to $882 million in 2019.
The company reports its half-year results on Tuesday.
(20min delay)
