Is amaysim a takeover target?

TPG's foray into the mobile market has shaken the industry. It may also make amaysim a takeover target.

TPG Telecom (ASX: TPM) has shaken up the mobile market with an audacious plan to build its own network from scratch. The company says it will invest more than $2bn over three years and utilise its fibre, backhaul and corporate resources to challenge the competition.

By its own admission, TPG will need to find 500,000 customers to break even on an EBITDA level but that doesn't accurately count costs. We estimate that, after counting network costs, TPG will need about 2m subscribers to break even.

The company will try to migrate 450,000 existing accounts to the new network but that still leaves a gap to fill. It may start looking longingly at amaysim (ASX: AYS) which has captured 1.1m mobile subscribers with low churn, decent margin and an open register. TPG could make its network instantly profitable with a takeover bid.

That may or may not happen but the mere threat should spur Optus, amaysim’s wholesale partner, into action.

Over the past decade Optus’ market share has actually fallen. All net subscriber growth has come via mobile virtual network operators, of which amaysim is the largest. It would be loath to lose 10% of its subscriber base in one go should amaysim fall to a competitor.

Vodafone, which will likely lose the bulk of its TPG-sourced customers, may also be interested.

Yet it is Optus that is best positioned to act. amaysim currently generates about $40m in EBITDA from its 1.1m subscriber base. If those customers were internalised into the Optus network, Optus could generate EBITDA of more than $120m by capturing both the wholesale and retail margin. As customers already use the mobile network, it would face the lowest integration costs and highest retention.

A takeover of amaysim by Optus makes sense for the larger firm. It could pay a multiple on amaysim's EBITDA of $40m yet capture earnings at three times that sum. It would, in effect, buy amaysim on a cheap multiple and, in doing so, take it off the market to prevent a rival from gaining a decent chunk of its business. amaysim must now be a takeover target.

Note: The Intelligent Investor Growth and Equity Income portfolios own shares in amaysim. You can find out about investing directly in Intelligent Investor and InvestSMART portfolios by clicking here.

Disclosure: The author owns shares in amaysim.