Shares in mobile phone store operator Vita Group Limited (ASX: VTG) have tumbled 5% today and 60% over the course of 2017 as the company conceded its major client in Telstra Corporation Ltd (ASX: TLS) wants to change the terms of their business agreements.
Vita’s past success has been based on the fact that it was able to operate Telstra branded stores for retail and business customers because Telstra supported its business model on commercially lucrative terms.
This made Telstra by far Vita Group’s largest source of revenue, however, now it seems that Telstra has decided the commercial terms it offers Vita Group are too generous and as a consequence is looking to renegotiate the remuneration terms and how it operates its national store networks.
Unfortunately, Vita Group appears to have little bargaining power when it comes to renegotiating “commercial terms” with Telstra. This means it may have few options other than to accept the licensee terms laid down by Telstra in attempting to grow its store network.
As a result of Telstra’s changing position, Vita has already flagged that H2 FY 2017 EBITDA will be below the first half’s result of $35 million, with the market concerned that operating profits are set to continue falling.
It’s possible that the recent share price falls may be a big overreaction if Vita is able to hammer out a commercially beneficial long-term deal with Telstra.
However, until further certainty is provided on the relationship the share price is likely to remain volatile.
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The Motley Fool Australia owns shares of Telstra Limited. Motley Fool contributor Tom Richardson has no position in any stocks mentioned. The Motley Fool Australia has no position in any of the stocks mentioned. 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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