TPG has elevated as the successful bidder for 2x10MHz spectrum in the 700MHz band at the recent auction conducted by the Australian Communications and Media Authority (ACMA). The acquired spectrum license commences from 1-April-2018 and expires on 31-December-2029. Through its existing business and infrastructure, TPG has most of the essential components of a mobile network operator already in place including Australia’s largest national dark fiber network, call centers and back-office systems supporting over 2 million customers across the consumer, business, corporate, government and wholesale segments. TPG will build a mobile network in Australia using current advanced technology for ~$1.9 billion, comprising of $600 million for network rollout capital expenditure over a three-year period to achieve 80% population coverage, and $1,260 million for the 700 MHz spectrum, which will be paid in 3 annual instalments. There are also numerous new entrant advantages that TPG will be able to enjoy, including being able to deploy current advanced technology, the rollout of fewer sites, and not needing to support legacy equipment (for 2G/3G networks).
TPG will fund the spectrum purchase over the next three years, and the capex for the rollout, through a combination of existing and new debt facilities, and operating cash flow. TPG already launched pro-rata entitlement offer to raise $400 million at a fixed price of $5.25 per new share and the immediate use of the entitlement offer proceeds will be to pay down debt to provide headroom to finance future drawdowns as needed for capex and spectrum instalment payments.
Major shareholders David Teoh and associates, and Washington H. Soul Pattinson are supportive of TPG’s mobile strategy and have pre-committed to take up their full pro-rata entitlements ($138 million and $101 million respectively). The Offer Price represents an 18.9% discount to a dividend-adjusted TERP (theoretical ex-rights price) of $6.473, and a 20.2% discount to the dividend adjusted $6.58 closing price on Tuesday, 11 April 2017.
FY17 guidance is affirmed
TPG expects that its mobile network would be EBITDA break-even with 5,00,000 subscribers and reaffirmed Mar-2017 guidance for underlying EBITDA for the group to be in range of $820-830 million in FY17. Further, the company Intends to implement a dividend reinvestment plan (DRP) commencing for FY17 final dividend and which is expected to remain in place for next two to three years.
Shares of Telstra, which was not allowed to bid in the auction because of its dominant market position, were down by 7% hitting their lowest level since 2012. Over the past 10 years Telstra Corporation Limited (ASX:TLS) has returned an average of 7.1% per year from dividend payouts and currently pays a dividend of 6.71% .
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