Following a strategic review, Leighton Holdings (ASX: LEI) has announced that its telecommunication assets are up for sale. These assets encompass the national fibre optic network, NextGen Networks, data centre specialist, Metronode, and Infoplex, which offers cloud computing-related services.
Leighton’s market capitalisation is less than $6 billion and with brokers forecasting an asking price of at least $1 billion for the assets, this is a significant divestment. While the review identified these telecom assets as non-core, the assets will be attractive to other industry players, particularly the strategic position of NextGen.
Looking past the headline, it is interesting to consider the growth prospects, and more importantly, the profit potential of data volumes, data centres, and cloud computing. With so many companies competing to gain scale, the timing of Leighton’s exit may be a warning to investors that the market is getting a little “hot”.
As the National Broadband Network (NBN) rollout continues and Telstra’s (ASX: TLS) previous monopoly power is diminished, the dynamics of the telecom sector and participants are altering too. TPG Telecom (ASX: TPM) already owns significant infrastructure but could look to increase its footprint by purchasing NextGen. Vocus Communications (ASX: VOC) also owns a valuable fibre network that it would no doubt be interested in adding to, however NextGen would most likely be too big a bite for the $130 million company.
Data Centres (DC) have been getting a lot of attention recently, with Macquarie Telecom (ASX: MAQ) recently signing a large government contract to provide managed hosting services in its DC. NextDC (ASX: NXT) is another player in the DC space, run by successful entrepreneur Bevan Slattery. Both companies may be interested in the Metronode business as they look to build further scale into their product offering.
While there is going to be significant growth in data and cloud usage in the future, exactly how that plays out is the million-dollar question. Investors need to always remain objective when assessing investments in new technology areas such as cloud computing, as industries can grow yet not provide commensurate profits for investors. Investing with a margin of safety is as important as ever.
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Motley Fool contributor Tim McArthur doesn’t own any of the stocks mentioned. The Motley Fool’s purpose is to help the world invest, better. Take Stock is The Motley Fool’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead. Click here now to request your free subscription. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.