From humble beginnings as a single shop selling computer hardware in 1986, TPG Telecom Ltd (ASX: TPM) has become the second-largest internet service provider in Australia. In 2017, it shocked the industry when it outbid Optus and Vodafone, forking out over $1.2 billion for 2x 10MHz of mobile spectrum in the 700MHz spectrum auction.
When it comes to David Teoh, we should now be used to expecting the unexpected. TPG’s acquisition of PIPE networks in 2009 also surprised the industry and appeared an expensive purchase at the time. However, that purchase has since proven to be a bargain and instrumental in giving TPG the infrastructure to compete with Telstra Corporation Ltd (ASX: TLS) and Optus, in both broadband and mobile.
When data usage exploded as online streaming took off, the telecom industry went through a consolidation phase. This saw the smaller players who didn’t own infrastructure be acquired by bigger players who did. Due to Teoh’s foresight, TPG had quietly acquired shares in iiNet, which helped them acquire 100% of iiNet and swiftly add almost another 1 million customers.
With iiNet being immediately cash flow positive and more than a doubling TPG’s customer base, this gave TPG serious cash to aggressively slash its debt. With the debt reduced, TPG then set about its foray into mobile.
There is a sense of foresight from Teoh that he is several steps ahead of the mobile sector, as was evident from the acquisition of PIPE networks. TPG has been supplying backhaul for Vodafone’s mobile network for years. In 2015, it announced a deal with Vodafone which saw Vodafone stitched up for 15 years in buying backhaul from TPG with estimated revenues of almost $1 billion.
A Telstra Competitor?
Naturally, the proposed the merger with Vodafone makes sense. Vodafone has been losing money on its Australian venture for years. TPG also needs the scale that Vodafone’s customers provide to give its investment in mobile with the best possible chance of making money. Realistically, neither company by themselves are probably any real threat to Telstra or Optus in mobile.
But TPG’s mobile venture has obviously been planned for many years, it is the result of incredible foresight, patience and timing. Even Telstra is taking TPG’s foray into mobile seriously, reducing prices and increasing data allowances on their plans. However, there looks to be a couple of headwinds in the mobile venture.
The first is from the Australian Competition & Consumer Commission (ACCC) who has expressed concerns over the proposed merger between TPG and Vodafone, with a final decision scheduled to be handed down on 28 March 2019.
The second is the capital expenditure required to build mobile capacity. As data usage increases and more people join the network, extra capacity is required which means more capital expenditure on behalf of TPG.
Is TPG A Buy?
Heavy capital expenditure combined with a price war means I am happy to sit out and watch TPG’s mobile venture from the sidelines as a spectator.
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