Not many stocks can claim back all of the devastating loss from yesterday's market meltdown but TPG Telecom Ltd (ASX: TPM) is one of the lucky ones as investors cheered news that it has struck two deals worth $1 billion with Vodafone.
The stock surged 6% in morning trade to $10.75 after management said it will provide dark fibre and network services to more than 3,000 Vodafone Australia sites for 15 years and signed one of the industry's largest Mobile Virtual Network Operator (MVNO) agreements that will see TPG's mobile phone customers move onto the Vodafone network from Optus.
TPG said it will spend $300-400 million expanding its dark fibre network by 4,000km to connect to Vodafone cell sites across the nation and that most of the capital expenditure will happen in the next three years.
Dark fibre is an unused optical fibre network and the deal is significant for TPG as it is anticipated to generate in excess of $900 million over the 15-year contract.
There is a mad scramble for scale in the telecommunications sector with a number of high profile acquisitions and mergers in recent times.
M2 Group Ltd (ASX: MTU) announced on Monday that it is backing a merger agreement with Vocus Communications Limited (ASX: VOC), after M2 lost the battle to acquire iiNet Limited to TPG a few months ago; while TPG tried unsuccessfully to thwart the merger of Vocus with Amcom Telecommunications.
The consolidation among smaller players will be an increasing threat to the dominance of Telstra Corporation Ltd (ASX: TLS), which is struggling to find meaningful growth opportunities.
The latest deal with Vodafone is good news for TPG shareholders as many worry the stock is looking toppy as it is trading on a current year consensus price-earnings (P/E) multiple of 27x.
I think a premium is justified given the multiple growth levers TPG has but the stock is no bargain. I think growth investors will find M2 a more attractive buy based on valuation grounds, particularly if it merges with Vocus.
M2 and Vocus estimate that the combined group will achieve cost savings of $40 million but analysts think this figure is too conservative.
M2 trades on a cheaper 2015-16 consensus P/E of 14x in large part because it holds no infrastructure assets unlike TPG. But the merger with Vocus (which trades on a 21x P/E) will change that. There is upside to M2's share price.
TPG has been partnering with Vodafone since 2010-11 and the new agreements will significantly expand the partnership. I won't be surprised to see TPG acquire Vodafone's Australian assets down the track.
