TPG Telecom (ASX: TPM) announced prior to open this morning that the company will acquire AAPT and Powertel from Telecom Corporation of New Zealand (ASX: TEL).
Ironically, it was just a few months ago that I almost bought shares in NZ Telecom simply because I thought the company’s fibre optic assets were undervalued. Unbelievably, TPG have snared the assets for $450 million. The true beauty of it is that TPG is funding the acquisition through debt and cash, so shareholders will not be diluted.
While the acquisition will bring important new customers to TPG, I think it’s fair to say that David Teoh, the executive chairman, has his eye on the end game – owning the telecommunications infrastructure that will run Australia for the next 50 years (or longer). “The incorporation of AAPT’s inter-capital fibre into TPG’s extensive CBD, metropolitan and international network assets,” he said, “will further enhance TPG’s position as an increasingly major force in the telecommunications market.”
Regular readers will know I have a keen interest in the development of the fibre optic infrastructure in Australia. TPG announced ambitions to connect up to 500,000 residences to their fibre network in September. A few weeks later I wrote, “The brilliance of this plan is that now that the NBN is not going to be fibre to the premises, there is no reason that customers would ever bother switching to the NBN.” This means that TPG will take (and keep) the most profitable fibre broadband customers.
It seems that I’m not the only one to have had this thought. The Australian Financial Review reports that Stuart Lee, the head of wholesale at Telstra (ASX: TLS) has warned that this ‘cherry-picking’ could undermine the NBN. However, I find the frank cheerfulness of Vocus (ASX: VOC) CEO, James Spenceley, far more compelling. “100 per cent this will have a negative impact on [NBN Co’s] business model,” he says, “the cheapest places to build a network that make the most amount of money are covered by the competitive carriers.”
Of course, Spenceley and Lee are coming from different perspectives. Telstra is the 400-pound gorilla that made the highly questionable decision to let others build the lion’s share of the fibre in this country. Vocus, a sprite by comparison, is a forward-thinking organisation that is masterfully connecting corporate Australia to the cloud (and the world) via ultra-fast, ultra-secure dark fibre.
Ultimately, investors in TPG must hope that the Coalition government will let companies like TPG and Vocus build the profitable parts of the fibre network. This is likely to render the NBN an expensive white elephant, or a justifiable subsidy of regional Australia, depending on how they play it. Given the government’s ideological bias, I think that it is likely that private companies will build the network. On the bright side, Teoh, Spencely and their competitors will do it more quickly and efficiently than NBN Co would.
Both Vocus and TPG seem fully valued at the moment, and there is little point in rushing to buy a company when the hype is high. TPG shares are up 14% so far today, but there may be an opportunity to buy on a retrace. In any event I do believe all long-term investors should have these five fibre optic companies on their watchlist.