David Teoh always knew his plan to bring more competition to Australia's once cosy telecommunications market was going to come at a cost. But the entry price is higher than some investors are comfortable with. As well as the $1.3 billion the TPG Telecom executive chairman paid last week for mobile phone spectrum, around $1 billion was wiped off the value of his company when the stock resumed trading on Tuesday.
The 17 per cent fall in TPG's share price partly reflects the fact the company had to raise $400 million from investors through a discounted rights issue when it had hoped to avoid going to the market to raise capital. The share issue was priced at $5.25 per share, which was a discount of 18.9 per cent to the dividend-adjusted closing price of TPG of $6.58 on April 11. TPG's stock closed at $5.50 and is now trading close to the entitlement offer price but well below the theoretical ex-rights price of $6.47, which is an indication of where it had been expected to trade.
At the end of the day David Teoh and Robert Millner, the chairman of Soul Pattinson and Brickworks, control more than 60 per cent of the company and wear the bulk of Tuesday's losses. This means TPG has the luxury of pursuing a long-term strategy with short-term consequences, something a listed company where institutional investors dominate the register might not be able to do.
The potential arrival of a fourth mobile entrant in Australia's once cosy telecommunications market has rattled investors across the sector. Telstra shares closed down 3.9 per cent to a four-and-a-half year low on Tuesday while shares in Vocus dropped 3.4 per cent. The second and third-biggest mobile players Optus and Vodafone are not listed in Australia.
The market has had the four-day Easter break to digest Teoh's plan so it is hard to call the losses a knee-jerk reaction. Telstra does look over-sold though given it will take three years before TPG completes the new network. Some analysts doubt the billionaire's ability to severely dent Telstra's market share even though his strategy to offer cheaper mobile plans and leverage off his existing infrastructure has merit. The market reaction is evidence though that investors are taking the prospect of new competition seriously. While it has been bad news for investors so far, consumers will benefit.
There is no doubt Teoh overpaid for the mobile spectrum it acquired last week for $1.26 billion. He also plans to pay an additional $600 million to build a network that reaches 80 per cent of the Australian population. While he still needs to prove he can make money from the investment, the drop in TPG's shares price does not mean Teoh's long-term vision is a dud. Clearly, Telstra's investors are worried.
UBS is confident about TPG's long-term prospects as a standalone mobile business but the impact of the equity raising as well as the increased capital expenditure required to fund the move has analysts downgrading the company's EPS forecasts by up to 40 per cent for the 2019 financial year.
The problem for Telstra is that the reaction to TPG's plan has been inflated by investors' existing doubts about Telstra's direction. A series of network outages, mixed messages about its Asia strategy, concerns about its Foxtel joint venture and a threat to the sustainability of the telco's coveted dividend payments have weighed on Telstra's shares.
Even before Tuesday's market fall, Deutsche Bank said Telstra was oversold and upgraded the stock to a "buy". It points to the company's sustainable dividend yield of 6.6 per cent, its superior network and a loyal customer base. TPG will focus on more value-driven customers. Telstra's market share will potentially fall by 3 per cent to around 47 per cent but the impact on its average revenue per user (ARPU) will be more severe.
However, the move is further evidence that the corporate oligopolies which have traditionally dominated Australian industry are under threat. Telstra, like Coles and Woolworths, will still retain its strong market lead but faces growing challenges from new competitors with the ability to offer consumers a cheaper alternative. The supermarket groups face a similar threat from entrants like Aldi.
michael.smith@fairfaxmedia.com.au
