TPG Needs the Merger with VHA, and to Grow Business Customers

S. Soh

Summary Bullets:

• TPG is facing headwinds in growing its revenue and there is limited room to expand its margins. It needs to find new ways to grow its business.

• The merger with VHA will give TPG mobile capabilities and greater scale to compete with Telstra and Optus; but it also needs to pursue growth from the business segment.

TPG released its H1 FY2019 results in late March 2019. Total revenue for H1 FY2019 (ended 31 December 2019) declined 1.5% YoY to A$1.24 billion, but underlying EBITDA and NPAT improved 2.8% and 3.5% respectively. Revenue and EBITDA growth was mainly due to improvement in its Corporate division, but the growth was offset by the decline of Consumer division due to the DSL to NBN migration and iiNet home phone decline. Within Corporate, growth was mainly driven by the Vodafone Hutchison Australia (VHA) fibre contract (contributed A$22 million of growth), which will not deliver long-term growth. While TPG has not been able to grow its revenue in H1 FY2019 compared to the same period in the previous financial year, it has been successful in reducing costs to improve its margins including a reduction in employment and overhead costs. With the consumer market challenged by competition and NBN migration, there is limited upside. There is also limited room for further cost reduction, so business-as-usual is not an option for TPG.

At this point, the best case scenario for TPG is for the merger with VHA to happen. The company has raised the stakes by announcing in late February 2019 that it would cease the rollout of its Australian mobile network. TPG designed its mobile network based on a small cell architecture and Huawei was chosen as the principal vendor for the network with a simple upgrade path to 5G. TPG cited the Huawei ban as the main reason for giving up the network rollout since the upgrade path is now blocked. This announcement should convince the regulator ACCC to give the green light since there will be no change in the level of competition in mobile services – there is not going to be a fourth mobile operator. A combined TPG-VHA entity is in a stronger position to compete with Telstra and Optus to deliver a broader set of fixed and mobile services, targeting both enterprise and SMB customers. This will give the entity more resources to invest in new areas such as 5G and IoT.

Whether the merger goes ahead or not, TPG (as well as VHA) should look for revenue growth from the business segment. Businesses from SOHO to large enterprises require reliable connectivity and digital solutions to enable their business to move fast. Revenue opportunities for 5G are linked to industrial IoT solutions that companies are willing to pay for to achieve greater operational efficiency or create new revenues. This requires investments in areas such as software-defined networking, digital platforms for fast ordering and provisioning, and other capabilities such as security and edge computing. Telstra and Optus are both doubling down on these areas and TPG/VHA can’t afford to fall behind for too long if it wants to be a serious contender to the two Tier 1 telcos in the enterprise space.

In the short-term however, the reality is that TPG’s management team will have their hands full, either dealing with business integration or working on plan b – possible scenarios include selling its mobile assets, using it as a last-mile access for broadband services, or finding other potential use case with its spectrum assets. Meantime, the company is in a holding pattern as it awaits the decision from the ACCC on the merger with VHA, which is currently expected to be made on 9 May 2019.

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