Australian broadband operator TPG has rattled markets by announcing plans to spend around A$1.9 billion ($1.43 billion) on building a new mobile network shortly after it secured airwaves in a government auction.
The operator beat off competition from Telstra Corp. Ltd. (ASX: TLS; NZK: TLS) and Optus Administration Pty. Ltd. , Australia's biggest mobile operators, to net a chunk of spectrum in the 700MHz at a cost of A$1.26 billion ($950 million).
After winning the airwaves, TPG Telecom said it would spend another $600 million ($450 million) on extending an "advanced" mobile network to about 80% of the population over the next three years.
The news triggered a huge slump in the share price of Telstra, which closed down 7.46% on the Australian Securities Exchange earlier today.
Telstra's shareholders are clearly unnerved by the prospect of fresh network competition in what has so far been a three-player market at the national level, with Telstra and Optus competing against smaller rival Vodafone Hutchison Australia .
At the wholesale level, the entry of TPG into the mobile market will also represent a loss of business for Vodafone, whose network TPG has previously used to provide mobile services.
Vodafone also picked up spectrum during the government auction, paying about $286 million ($215 million) for a smaller slice of the 700MHz band than TPG received.
TPG said it would fund the rollout of its own network through existing and new debt facilities and operating cash flow. It also plans to raise another $400 million ($300 million) on the market by issuing new shares at a fixed rate of A$5.25 ($3.94) per share.
New entrants to mobile markets have often struggled against long-established rivals but TPG will be able to draw on the networks it has already built for broadband, including an extensive dark fiber network as well as call centers and back-office systems.
It also reckons it will the advantage over Telstra and Optus of not having to support legacy technologies.
The hope for TPG -- and fear for the current mobile establishment -- is that it can replicate the success of French telco Iliad (Euronext: ILD), which has caused mayhem since entering its country's mobile market in early 2012. (See Iliad to Ramp Up Spending in France This Year.)
Like TPG, Iliad started out in the broadband market before turning its attention to mobile, and it has continued to grow at the expense of bigger rivals.
TPG currently serves 1.9 million broadband customers in Australia as well as 500,000 mobile subscribers through its mobile virtual network operator deal with Vodafone. In an investor presentation, TPG indicated that it saw "significant cross-selling potential" in those customers, "with each household representing multiple potential mobile customers."
The development of its own mobile network should also make it easier for TPG to provide "bundled" packages that include both fixed and mobile services, and will mean it can start to wean itself off Vodafone's network.
Investors, however, may be concerned about the expense of the mobile move, which reportedly comes just weeks after TPG sounded unenthused about raising capital to fund a mobile venture.
TPG seems to have thrown caution to the wind to fend off competition from Telstra and Optus during the spectrum auction, which raised a total of A$1.5 billion ($1.13 billion) for government coffers, easily beating the reserve price of A$857 million ($643 million).
"The public has realized record rates of return from the sale," said Richard Bean, the chairman of the Australian Communications and Media Authority, in a statement.
For its A$1.26 billion ($950 million), TPG gets 2x10MHz of spectrum, with Vodafone receiving a 2x5MHz allocation for the A$286 million ($215 million) it spent. TPG will make its payment in three installments beginning in January next year, with subsequent fees due in January 2019 and January 2020.
Capital expenditure is set to increase sharply as a result of the company's investment program, rising from A$281 million ($211 million) in the fiscal year to July 2016 to between A$512 million ($384 million) and A$1.1 billion ($830 million) in the current one.
That projection includes capex in Australia, where TPG is also building a new network.
However, TPG reckons the Australian mobile venture can become "EBITDA-positive" with just 2% of the market, or 500,000 customers -- the same number it currently serves through the wholesale deal with Vodafone. With a 6-7% share of the market, it will be EBIT-positive, it says.
Thanks to current business, TPG expects underlying EBITDA to rise from about A$775 million ($581 million) in the last fiscal year to A$820-830 million ($615-623 million) this year.
Shareholders may be concerned about the potential impact of the latest plans on TPG's debt situation, although the operator promised to "maintain comfortable headroom to its net debt/EBITDA covenant" in its presentation.
Net debt was about 1.8 times EBITDA in the last financial year.
— Iain Morris, , News Editor, Light Reading