David Teoh’s TPG is a company in limbo – experiencing a sliding doors moment. In May, the competition regulator will decide which of these doors the telco can move through – either down the path of a merger with Vodafone or to a less palatable place which includes dealing with a $1.2 billion 4G spectrum white elephant.
Some of the value of this spectrum has been written down (by $92 million) but if we follow the piece of string that leads to the Australian Competition and Consumer Commission successfully blocking the TPG/Vodafone merger, then TPG spectrum does not have $1.2 billion or even $1.1 billion of value.
An auction of this spectrum (or any asset) requires interested buyers. It’s hard to see how there could be any more than three potential parties – Telstra, Optus and Vodafone – and even harder to see any of them mounting a bidding war for it.
The main reason is that these established mobile telecommunications operators (mostly) already have sufficient 4G and might be interested in bits to fill out any gaps in their networks.
The second is that 4G is yesterday’s technology albeit necessary. 5G is the go-to spectrum that will deliver speeds, capacity and the real enabler of the next level step up in turbocharging the Internet of Things.
In delivering its first-half result on Tuesday, (which was reasonably strong considering the NBN headwinds are buffeting all players in the broadband market) TPG said selling its spectrum was an option being considered if the Vodafone merger didn’t proceed.
The other option was to find some use for the spectrum within the company. Experts say this could be by introducing a fixed wireless service. Yes this term is something of an oxymoron but basically it means delivering broadband to the premises but using mobile spectrum to deliver the last mile rather than using fibre or copper.
Using this technology would provide TPG with another avenue to compete with the NBN.
Even if this were pursued, telco boffins suggest the return on this spectrum asset would not justify its carriage in the books at $1 billion plus.
Analysts have had a bit of stab at guessing what the 4G spectrum is worth.
In late January, for example, Citi suggested it would attract a 50 per cent discount to the purchase price. (This assessment was made prior to the $95 million write-down).
TPG also has about $263 million worth of the more valuable 5G spectrum which is tied up in a joint venture with Vodafone. It remains there regardless of whether the merger proceeds, so presumably Vodafone would have first dibs on TPG’s portion.
Suffice to say for TPG there is plenty of daylight between second prize (outlined above) and first prize which is receiving a green light from the ACCC for the merger to proceed.
There is a huge amount riding on the decision that has been postponed twice already and is now expected in May.
There are numerous conspiracy theories about why it has taken so long. They differ depending on which kool aid fountain one has been drinking from.
Remember when this merger was announced last year, TPG had already begun to build its own mobile network (that’s what the 4G was for). Given TPG was merging with Vodafone, the third biggest player in mobiles, the ACCC chairman Rod Sims had legitimate concerns that TPG’s fledgling challenger mobile network would be subsumed into Vodafone and the fourth player hope would fizzle.
In January, Teoh’s TPG abandoned its plans to build a fourth network, leaving Sims’ arsenal to block the deal somewhat depleted.
Whether Teoh’s move was motivated by a desire to circumvent Sims or whether it was (as TPG argued) the result of the government’s decision to ban Chinese equipment provider, Huawei, from involvement in the rollout is something of a moot point.
The fact remains that without a mobile network, the two telcos don’t really compete. TPG is big in broadband. Vodafone is a mobile company – which has a very small broadband business.
Some are speculating that the delayed verdict is a sign the merger will be blocked and that the ACCC needed plenty of time to make an iron clad case for its decision, which is likely to be appealed.
Others say Sims is desperately attempting to mount a case to block it but can’t and doesn’t want to concede too early. In other words, the delay is positive for the chances of the merger proceeding.
The only thing everyone agrees on is that Sims was very attached to the idea of a fourth mobile network. At least more attached than anyone else in the industry.
Elizabeth Knight comments on companies, markets and the economy.
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