3 top telcos that continue to grow by acquisition

Investors in Australia’s best telecommunication companies will continue to make impressive capital gains on top of receiving regular dividends.

There was significant consolidation within the telecommunication sector in 2013, with the market generally rewarding shareholders in the acquiring companies. Perhaps the most exciting deal was the sale of AAPT and Powertel by Telecom Corporation of New Zealand (ASX: TEL) to TPG Telecom (ASX: TPM).

I wrote at the time that the acquisition made TPG a more attractive company. Sure enough, shares in TPG are up about 20% in the month, since they announced the debt-funded acquisition; one of the safest opportunities for quick profits that I’ve seen recently.

Much larger capital gains can be achieved by investing in the best Australian small-caps. Smaller Australian telcos, such as MyNetFone (ASX: MNF) and BigAir (ASX: BGL) have been rewarding shareholders with massive capital gains, as they grow organically and by acquisition.

In that vein, BigAir announced on 20 December 2013 that they had agreed to buy the network infrastructure and telecommunication business of struggling minnow telecommunication company, Anittel (ASX: AYG). Annitel will move its business focus to hosted collaboration services, part of the company’s growing cloud-based capabilities.

BigAir will fund the $6.5 million acquisition with debt. BigAir CEO, Jason Ashton, said the acquisition enables the company to “both broaden and strengthen its communication service offerings in the corporate market, and adds to our existing fixed wireless, unified communications and community broadband offerings.” The acquisition is expected to add EBITDA of $2 million per year, after synergies, and should complete by the end of January 2014.

Meanwhile, the directors and managers of MyNetFone have not been idle. The company recently increased its EBITDA guidance by 6% and reported that it had acquired the customers of voice over internet protocol (VOIP) provider PennyTel from the liquidator. Although the acquisition will not have a material impact on results, it’s certainly a positive step, as it delivers 30,000 new customers to the company. I once underestimated MyNetFone (when shares traded at around $1.20), but subsequently repented and chose the company as my top stock in September 2013. Since then shares are up over 28%, but I haven’t sold a single share and don’t intend to at current prices.

Foolish takeaway

The telecommunications sector underwent considerable consolidation in 2013, due in part to a proliferation of new and small telcos in prior years. The industry is well suited to acquisitions and mergers, because scale is such an important factor in profitability and potential synergies abound. I believe the best run telcos (both large and small) will prosper in the long term, rewarding shareholders handsomely for the time spent researching the sector.

Wondering where you should invest $1,000 right now?

When investing expert Scott Phillips has a stock tip, it can pay to listen. After all, the flagship Motley Fool Share Advisor newsletter he has run for more than eight years has provided thousands of paying members with stock picks that have doubled, tripled or even more.*

Scott just revealed what he believes could be the five best ASX stocks for investors to buy right now. These stocks are trading at near dirt-cheap prices and Scott thinks they could be great buys right now.

*Returns as of August 16th 2021

Motley Fool contributor Claude Walker (@claudedwalker) owns shares in TPG Telecom and MyNetFone.

More on ⏸️ Investing