TPG shares rise after Optus answers partnership call

TPG is calling on Optus to solve its regional network requirements.

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The TPG Telecom Ltd (ASX: TPG) share price is up 3% after announcing it had signed a regional network sharing agreement with Optus.

The two businesses have signed agreements to create a regional multi-operator core network (MOCN) to extend TPG Telecom's 4G and 5G mobile networks.

This follows the previous attempt by TPG to work with Telstra Group Ltd (ASX: TLS), which the ACCC blocked.

TPG and Optus regional network agreement

By working with Optus, TPG's mobile network will reportedly reach 98.4% of the population.

TPG's number of regional mobile sites will increase by more than threefold to 2,444. This move will double the geographic coverage from 400,000 square kilometres to around 1 million square kilometres, and TPG will gain access to the Optus 5G regional network as it's rolled out.

All of the ASX telco share's brands, including Vodafone, TPG, iiNet, Lebara and felix, will benefit from the network sharing agreement. Services include voice, data, SMS, fixed wireless and Internet of Things (IoT) for consumer and enterprise-grade customers.

This regional MOCN will use both the Optus and TPG spectrum, delivering "improved service quality and speeds for all customers". The MOCN agreement will run for 11 years, with an option for TPG to extend for a further five years.

Both carriers will continue to operate their own core networks, enabling "differentiation of service for customers and independent control of security and resiliency."

If approved by regulators, the regional MOCN is expected to be operational from early 2025.

TPG thinks this will create "significant value" for the company, enabling its various brands to better compete for regional and metropolitan customers who require regional mobile network coverage.

How much will this cost?

The ASX telco share noted it would avoid future operating and capital expenditure that would have been required to operate, maintain and expand its own regional mobile network. TPG said it expects to avoid cumulative gross cash costs of between $575 million to $675 million over the 11-year term.

Net of spectrum receipts, TPG estimates it will pay approximately $1.17 billion to Optus over the 11-year term. This represents around one-third of the costs TPG would have to spend on building, operating and maintaining a similar network in regional Australia.

Total service fees will be approximately $1.59 billion over the 11 years, with a fixed component of $900 million and additional fees for 2,444 5G sites that are expected to total approximately $690 million over the term. TPG's annual 5G site fee component will grow as Optus accelerates upgrading its regional network to 5G before completion in 2030.

TPG will monetise its under-utilised spectrum holdings in regional Australia, it will receive an annualised income of approximately $38 million, starting in FY25. Assuming a similar level of spectrum is licensed to Optus over the entire 11-year term, the estimated receipts from Optus will total $420 million.

TPG expects the improvement of its mobile network will "enable it to accelerate mobile subscriber growth over time as a result of reduced churn and increased addressable market."

Impacts to short-term profits

However, in FY24, TPG expects to recognise between $230 million to $250 million of non-cash charges related to the 755 total network sites within the MOCN area.

There is no change to TPG earnings before interest, tax, depreciation and amortisation (EBITDA) guidance for FY24, with the guidance range being $1.95 billion to $2.025 billion, including transformational costs but excluding any material one-off items (such as items related to the MOCN).

In FY25, EBITDA is expected to be hurt by between $55 million to $65 million, including MOCN fees to Optus, operating expense savings, spectrum receipts from Optus and increased go-to-market expenses. This will be offset on a cash basis with a $50 million reduction in capital expenditure requirements.

A negative net profit after tax (NPAT) impact of approximately $10 million to $20 million is estimated in FY25.

TPG expects the MOCN arrangement to achieve break-even in cash terms from FY26 onwards. If profit is helped over the long-term by this MOCN, it may help TPG shares.

Motley Fool contributor Tristan Harrison has no position in any of the stocks mentioned. The Motley Fool Australia's parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia has positions in and has recommended Telstra Group. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Scott Phillips.

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