The TPG Telecom Ltd (ASX: TPM) share price suffered a rocky start of trade today after management warned of big write-downs that is likely to force the telco into a first half loss.
This could very well be the first time the telco delivers a net loss as I can't remember a time when the group posted a negative bottom line in either its interim or full-year results.
Investors are taking the news in their stride. The TPM share price shed 0.6% of its value to $6.59 at the opening bell against a weaker S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index, which fell around the same amount.
In contrast, the Telstra Corporation Ltd (ASX: TLS) share price lost 1.6% to $3.16 although the Vocus Group Ltd (ASX: VOC) share price gained 0.6% to $3.60 at the time of writing.
Not so bad news
The decision by TPG to can its mobile network buildout will shave nearly $230 million off its interim net profit as the company will have to take the pain in one hit instead of amortising it over a few years as it's allowed to do if it had proceeded with the building of Australia's fourth mobile network.
To put the figure in perspective, TPG posted a statutory net profit of $200 million in the six months to January 31, 2018.
The good news is that the write-down is "non-cash", which means its ability of pay its dividend won't be affected. Further, the big impairments won't impact on its underlying profit or its earnings before, interest, tax, depreciation and amortisation (EBITDA) guidance.
Management also assured investors that despite the painful accounting adjustment, it remains "comfortably within its banking covenants".
The impairments also are moot if the marriage between TPG and Vodafone proceeds as these assets will be used (and will have value) in the merged entity.
What's in the ~$228 million write-down
But given the tie-up is subject to shareholder and regulatory approval, the accounting rules stipulate that TPG should assume the worse.
The write-downs relate to three assets. The first is the 5G spectrum with Australian telcos paying more than $800 million for the right to use the airwaves.
TPG will write-off around $92 million in value for its spectrum licenses to reflect the fact that the licenses have finite lives as they expire.
The second impairment relates to its mobile sites. These are properties where TPG had originally intended to put their mobile equipment and the group will cut the value of these assets by around $76 million.
Finally, TPG will take around a $60 million hit from the interest and debt used to pay for the spectrum licenses.
TPG will announce its interim results on March 19.
