The TPG Telecom Ltd (ASX: TPM) share price will be on watch on Tuesday after the telco company provided an update on its mobile network rollout.
According to the release, TPG Telecom has decided to cease the rollout of its mobile network in Australia due to factors outside its control.
The release explains that over the last 18 months the company has been in the process of designing and implementing a mobile network based on small cell architecture.
The principal equipment vendor selected for use in the network was Chinese tech giant Huawei. TPG Telecom selected Huawei and the design of its network as it provided a simple upgrade path to 5G, using Huawei equipment.
However, the Government’s decision to prohibit the use of Huawei equipment in 5G networks last year means that this upgrade path has now been blocked.
Management has been busy exploring whether there are other solutions available to address the problem created by the Huawei ban, but concluded that “it does not make commercial sense to invest further shareholder funds (beyond that which is already committed) in a network that cannot be upgraded to 5G.”
So far the rollout has incurred capital expenditure of approximately $100 million, with additional capital expenditure of approximately $30 million already committed.
One small positive is that it doesn’t this to impact its FY 2019 guidance and has no plans to write-down the mobile network costs capitalised at this time.
The TPG board advised that at this stage it is not in a position to announce any decision on its future strategy for its current spectrum holdings. It intends to consider carefully all options available and will update the market once decisions are made.
TPG’s executive chairman, David Teoh, said: “It is extremely disappointing that the clear strategy the Company had to become a mobile network operator at the forefront of 5G has been undone by factors outside of TPG’s control. Over the past two years a huge amount of time and resource has been invested in creating and delivering on a strategy that would have positioned TPG very favourably to exploit the opportunities that the advent of 5G will present.”
He added: “While TPG remains committed to the planned merger with Vodafone Hutchison Australia, the Company must continue to make independent business decisions in the best interests of TPG shareholders pending the outcome of the merger process.”
Should you invest?
I would suggest investors hold tight and wait to see how the situation unfolds over the coming months, especially with the TPG-Vodafone merger decision due during the period.
The same applies for Telstra Corporation Ltd (ASX: TLS), even though this could arguably be a big positive for the telco giant.
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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Limited. The Motley Fool Australia has recommended TPG Telecom Limited. 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 Scott Phillips.