The Australian Competition and Consumer Commission (ACCC) has announced that growing fibre-optic telecommunications company TPG Telecom Ltd (ASX: TPM) is in the clear to build the fibre-to-the-basement network it has already begun building. However, the ACCC is now considering whether the new network will be subject to right-of-access regulations.
Although TPG Telecom shares pipped up over 2% this morning on open, it's my belief that the market was already largely assuming that this would be the result. The ACCC are not known for bizarre interpretations of legislation. Also, I reported 11 months ago that the Chairman of the ACCC, Rod Sims had said: "If you have a number of players doing TPG-like things then they in a sense self-regulate because if I clobber you here the other guy will get you back over there."
The main threat to TPG's plan is that the government actually legislates to kill it, although I consider that unlikely. The secondary threat is that the ACCC forces TPG Telecom to make its infrastructure available at lower wholesale rates than it would otherwise offer. I would not rule out this eventuality, although it would hardly destroy the telco's plan.
Whatever the final outcome, TPG will almost certainly be allowed a commercial return on wholesale services. The likely worst case scenario is that the company must match the wholesale rates offered by NBN Co, even within 1km of existing cables – an area that it considers (and I believe to be) exempt from those rules.
I suspect that TPG has planned all along to provide the network at wholesale rates to other retailers such as iiNet Limited (ASX: IIN) or M2 Group Ltd (ASX: MTU), although some may disagree with me. In October last year journalist Fran Foo interviewed TPG Telecom CEO David Teoh and reported unequivocally that, "TPG will also wholesale the service to other internet providers." Although this would make sense to me, I'm not sure that that is what has happened in practice. It wouldn't surprise me if they were a bit slow to make that offer to their competitors and it may take an ACCC ruling to speed things up.
The main concern for TPG shareholders is the fact that NBN Co CEO Bill Morrow may want to curtail their plans. According to top-notch telco journalist, Josh Taylor, "NBN Co will roll out fibre to the premises in those areas initially targeted by the company." This could be quite annoying for the company, because it only benefits from the wholesale exemption in residences that are within 1km of existing fibre-optic cables. The company will be keen to beat NBN Co to as many of those buildings as possible.
With cash-flow unlikely to exceed $300 million for FY 2014, it looks like the market is assuming that TPG will be successful in its plans. I think that's correct, but at best there is a small margin of safety at current prices. While I question my decision to sell my TPG shares – the company is a good one – I can't bring myself to buy back in at current prices.
