Shares in TPG Telecom Ltd (ASX: TPM) have plunged around 19% to $5.40 today after the telco returned to the ASX boards having completed an institutional capital raising for $400 million at $5.25 per share.
The group will invest $1.9 billion over the next three years to build its own mobile network, with around $1.26 billion spent on acquiring spectrum and $600 million in capital expenditure constructing the physical networks required to support it.
Today's big share price fall is likely a reflection of the substantial discount offered to eligible shareholders to take up their rights to purchase new shares in the business.
The offer price of $5.25 per new TPG share is around 21% lower than the stock's last traded price, with the two major shareholders in the business probably wanting to secure as big a discount as possible in order to help line their own pockets while retaining a long-term investor focus.
The company also went without the rights to an 8 cents per share interim dividend today, which tends to add to selling pressure on shares as short-term focused investors may look elsewhere for their next dividend hit.
Although it has been nothing but share price pain for TPG investors recently they do have the opportunity to buy more shares at the discounted price of $5.25 as compensation and the company is now positioned to challenge the dominance of Telstra Corporation Ltd (ASX: TLS).
The mobile industry in Australia currently generates operating profits of around $8 billion in total for its key players including Telstra, Optus and Vodafone, with Telstra taking the lion's share and generally able to charge a price premium thanks to the perceived strength of its network.
Still, $8 billion in operating profits up for grabs is serious money and the telco market will produce some winners and losers over the years ahead. I expect TPG could be a winner thanks to its adaptability and strong management team plotting its mobile strategy against the likes of Telstra and Vodafone.
History shows that competition is what TPG Telecom does best and Telstra's previous competition in the mobile space has been poor with Vodafone and Optus helping create a competitive comfort zone that failed to shake up a lucrative market.
TPG could show them how its done and the group expects to hit breakeven from its planned mobile network with just 500,000 subscribers, or a market share around 2%. Demand for mobile services in Australia is also likely to remain on a steady uptrend thanks to strong population growth which provides all the players in the market a decent tailwind.
Accordingly, I would rate the shares a buy at today's prices, although it's possible they get cheaper as investors get nervous over the capital expenditure ahead and potential for dividends to come in below expectations.
