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TPG Telecom Ltd to challenge Telstra Corporation Ltd in mobile space

Australia’s second-largest telco business TPG Telecom Ltd (ASX: TPM) confirmed its much anticipated move into the mobile sector today by announcing that it has successfully bid $1.26 billion for 700 Mhz wireless mobile spectrum to be payable in three equal instalments.

Wireless spectrum is a frequency level generally between 700 Mhz and 2.6 Ghz over which wireless signals can be transmitted to provide mobile communications. However, the transmission capacity at each spectrum frequency is limited which is why the government regularly auctions off the right to use the spectrum to private mobile operators.

Unfortunately wireless signals only transmit over a certain distance, which is why some mobile operators’ networks are superior to others, but TPG should now have the infrastructure in place to provide real cut-price competition to dominant operator Telstra Corporation Ltd (ASX: TLS).

In total TPG’s final push into the Australian mobile space is expected to cost around $1.9 billion with the cost to be funded by operating cashflows, debt facilities, and a $400 million capital raising for existing shareholders priced at $5.25 per share.

This is a hefty 21.2% discount to the last closing price of $6.66 and reflects the fact that TPG’s two largest shareholders in its chairman David Teoh and large institutional backer Washington H Soul Pattinson & Co. Ltd (ASX: SOL) both intend to take up the offer.

Analysts are likely to be working through lunch crunching the numbers today, with TPG also having large upcoming capital expenditure commitments for its move into mobile in Singapore and to fund its roll out of a fibre-to-the-basement network to compete with the National Broadband Network.

Generally, competition has always been what TPG does best and fortunately its main rival Telstra is something of a sitting duck, which means TPG may produce some spectacular returns to investors over the 5 to 10 years ahead.

I’m not surprised to see Telstra’s share price down 5.7% this morning as it is a less well managed company strongly reliant on the dominance of its mobile operations to produce cash flows for investors in the years ahead. There’s also the possibility of TPG moving closer to Vodafone Australia a company with which it already has a deep infrastructure sharing relationship.

I have written multiple times over the last six months as to why I think TPG shares look a buy and Telstra shares look a sell and today’s news does nothing to change that opinion.

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Motley Fool contributor Tom Richardson owns shares of TPG Telecom Limited.

You can find Tom on Twitter @tommyr345

The Motley Fool Australia owns shares in Washington Soul Pattinson. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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