Is the TPG Telecom Ltd (ASX: TPM) share price a buy after the appeal win to merge with Vodafone Australia?
The market certainly seems to think so with the TPG share price up 9.4% since the announcement decision, though it has drifted 5.5% low from the high a week ago.
What does a merger mean?
At the time of the merger the two telcos said that the merger would combine two highly complementary businesses to create a leading integrated, full service telecommunications company with a portfolio of fixed and mobile products for consumers, SMEs and enterprises.
The merger is designed to provide scale and financial strength so that they can more effectively compete with Telstra Corporation Ltd (ASX: TLS) and Optus.
The pro forma enterprise value of the two would be approximately $15 billion with combined revenue of over $6 billion, combined earnings before interest, tax, depreciation and amortisation (EBITDA) of over $1.8 billion and 'operating free cash flow' of $0.9 billion.
The merger is also expected to deliver substantial cost synergies from the combination of networks, cutting duplicated costs and benefiting from economies of scale. And on the revenue side there is the potential to cross-sell products to the respective corporate and consumer customer bases of TPG and Vodafone Australia.
TPG will pay a dividend before the merger to ensure that TPG shareholders own 49.9% of the combined business and Vodafone Australia shareholders will own 50.1% of the business.
What about dividends?
At the time of the original merger announcement TPG said that strong cash flow generation is expected to support an attractive dividend.
Fellow telco business Telstra is known for its dividends, so it wouldn't be surprising to see the combined TPG-Vodafone business maintain a high dividend payout ratio.
With growth reliant on how 5G turns out, at least investors will be able to rely on a good dividend.
Foolish takeaway
Time will tell how effective TPG and Vodafone are at combining two large businesses and creating those synergies. There's certainly a lot of potential, but it seems the quick gain has already been made. I'm looking at other opportunities.
