The big news last Friday was the announcement by TPG Telecom Ltd (ASX: TPM) that it had offered $1.4 billion (equating to $8.60 per share) to acquire iiNet Limited (ASX: IIN).
Bringing together TPG and iiNet will create a company with a market capitalisation of approximately $8.4 billion. The enlarged TPG will also boast pro forma revenue of $2.3 billion, pro forma earnings before interest, tax, depreciation and amortisation of $654 million (before expected synergy benefits) and 1.7 million broadband customers.
While these numbers are certainly impressive and make TPG the clear number two fixed-line telco provider ahead of Optus, owned by Singapore Telecommunications Ltd (CHESS) (ASX: SGT), it is still a distant second to the telco giant that is Telstra Corporation Ltd (ASX: TLS).
In comparison, Telstra commands a market-leading share of the broadband market with around 3 million subscribers. In percentage terms, TPG will emerge with a 25% share of the broadband market, while Telstra's share currently stands at just over 40%.
One of the advantages of TPG's enlarged scale is the decreased reliance the company will have on telecom infrastructure owned by Telstra. Which brings us to the elephant in the room, or at least stomping around outside is the National Broadband Network (NBN). If and when the NBN finally arrives on people's doorsteps in earnest, this will be the ultimate leveller which will allow TPG to truly bypass Telstra and compete on an even infrastructure playing field.
There is no doubt that future NBN expectations are at least partly behind TPG's offer for iiNet. The group's increased scale makes it a serious competitor to Telstra and Telstra's shareholders will need to watch closely to see if more aggressive competition from TPG puts pressure on Telstra's margins.
Of course no discussion of the telco sector ever seems complete without referencing Telstra's dividend. While investors can have a relatively high level of confidence that a dividend of 30 cents per share is in store from Telstra this year, exactly what the combined pay-out from the larger TPG will be is hard to know.
