TPG Telecom’s big gamble

TPG’s announcement on 12 April that it plans to build a mobile network to compete with Telstra, Optus and Vodafone should be more than a little worrying for TPG shareholders.

The salient points were:

•  TPG paid an extremely high price ($1.26 billion) for 2x10 MHz (for just under 11 years) in the government’s 700 MHz spectrum auction (twice what Telstra had paid in a 2013 auction);

•  TPG’s forecast maintenance spend of $600 million over three years (for a mobile network with a supposed 80% reach of the Australian population) was widely viewed as ridiculously low by many commentators; and

• To part fund the spectrum purchase, TPG is conducting a non-renounceable pro-rata entitlement offer to existing shareholders at $5.25(!) per share, a 20% discount to the closing price on 11 April and a price the shares have not traded at since July 2014.

It should also be noted that TPG (TPM.AX) is attempting to become the 4^th mobile player in the Singapore market at the same time as its adventure into the Australian mobile market. 

When TPG announced its foray into the Singaporean market, I asked a friend who knows a great deal about the telecommunications market in Singapore (and happens to be a Singaporean national) what he thought of TPG’s ambitions in Singapore. He recounted all the past failures of those who tried to compete against the incumbent players in that market and concluded by stating that there was no reason to believe that TPG would have any different experience.

What TPG is essentially doing is taking on very high levels of debt, vastly increasing its interest and amortisation expenses and therefore, significantly reducing its return on equity for what is at best a marginally profitable exercise. It also assumes that the established players will simply allow TPG to just walk away with their mobile customers! It’s a classic case of growth for growth’s sake.

It is completely illogical for anyone to think that a company that has paid twice as much for its spectrum licence than its competitors and does not have an existing (complete) network in place can price its products to achieve sound profits against incumbent players.

After initially being very successful, TPG has struggled in recent times. The share price peaked at $12.93 in July 2016 and will have declined by 59% once it comes out of its current trading halt.

At the $5.25 capital raising price, major TPG shareholder Washington H. Soul Pattinson (SOL.AX) will have seen it’s shareholding in TPG decline by approximately $1.6 billion since that peak in July 2016. And yes, Soul Pattinson did purchase that shareholding at a mere pittance of what it’s now worth, but to sit on your hands while $1.6 billion evaporates isn’t the best management in my book.

The market price of TPG’s shares indicates that there is little confidence in the company’s strategies. I have to say that on this occasion, I agree with the market.