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What you need to know about TPG Telecom

Australia’s fourth-place telecommunications carrier, TPG Telecom (ASX: TPM), has begun trials on its new fibre-to-the-basement plan (FBBT), which will allow superfast broadband services to half a million apartments across the nation’s capital cities and metropolitan areas.

TPG is an Australian-based, full service telecommunications company providing consumer, wholesale and corporate telecommunications services. The business offers voice, internet and data solutions to a range of customers.

In particular, its internet service offers dialup products, ADSL, ADSL2+ and SHDSL broadband access, email services, website and domain name hosting. The products have both a domestic and international data backbone, enabling the provision of high quality, low-cost internet services.

It is this low-cost internet service that caused Chief Executive David Teoh at the company’s Annual General Meeting, to hit back at recent criticisms from Telstra (ASX: TLS). Telstra’s wholesale general manager, Stuart Lee, has said that TPG would be able to control all aspects of the broadband supply chain in servicing its customers. This would undermine NBN Co’s ability to pay back its $20.4 billion capital cost.

Telstra is displaying self interest, as it would not be paid a fee for usage of either its copper or fibre network. Should TPG be allowed to proceed, the likes of Telstra, iiNet (ASX: IIN) and Singapore Telecommunications (ASX: SGT) owned Optus would employ fibre networks to follow the same strategy as TPG.

In reply, Mr Teoh highlighted the benefits of free market competition. He stated that only certain sections of the apartment market could be approached, so instead of 500,000 apartments, 30% of this figure (150,000) would be a more appropriate number to quote and is relatively small.

The investment case for TPG was strengthened at first glance by Mr Teoh’s comments made yesterday, indicating that the new fibre network would be a “rock solid” revenue contributor to TPG’s business, providing a recurring revenue stream.

He also outlined plans to wholesale the service to other internet service providers, while offering its own retail customers better broadband plans than achievable using either the copper network or the NBN. He was confident that free cash flow would fund the network. This has been made possible by being net positive cash flows for the first time this month, since TPG acquired Pipe Networks in 2010.

Foolish takeaway

It would appear that TPG is beholden to the FBBT plan being approved through the courts. According to some in the investment community, a successful outcome has already been factored into the share price.

If TPG was to be successful, competition by all other carriers will enter those same 500,000 apartments, thereby undoing any potential competitive advantage.

Further, there is anti-cherry-picking legislation in place which TPM seems unconcerned by on the basis that these extensions (FTTB) are within 1km of TPM’s fibre network

In my opinion, there appear to be too many legal uncertainties to be a confident buyer.

 

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Motley Fool contributor Mark Woodruff does not own shares in any of the companies mentioned in this article.

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