TPG buys more staying power

The market has given TPG Telecom’s acquisition of AAPT from Telecom Corporation of New Zealand the green light, pushing the telecommunications provider as much as 14 per cent higher earlier in the day.

Domestically the broadband market has consolidated over the past year, resulting in fewer companies the likes of TPG and iiNet could acquire. For TPG, AAPT as a cash flow positive offering is an attractive opportunity, which will help it continue deliver earnings growth to investors.

Following iiNet’s acquisition of Adam Internet, AAPT was the last internet service provider offering of significant scale with wholesale access to infrastructure. TPG’s move to acquire AAPT will increase its ability to leverage on the rollout of the National Broadband Network (NBN). The acquisition provides TPG with fibre access to 1,500 premises and fibre access to more than 50 per cent of the NBN’s point of interconnect.

The acquisition allows TPG to leverage on the infrastructure base it has steadily developed and future plans of extending fibre to the building (FTTB) under the NBN rollout. Existing infrastructure in conjunction with the additional capacity provided through AAPT’s NBN exposures will afford TPG the opportunity to continue improving its return on capital.  

On the surface the acquisition looks appealing and the future success of integrating AAPT into TPG will come down to execution. Examining the financials over the past five years shows TPG has improved metrics year-on-year, despite an operating environment being convincingly dominated by Telstra and until recently Optus under Singtel’s guidance. Ultimately the acquisition of AAPT will enhance TPG’s staying power and influence in the competitive broadband market.

Earnings growth for TPG has been led by broadband and a wider geographical footprint across this space can only be viewed as favourable. Reporting for the full year broadband subscribers increased 12 per cent and the earnings margin increased by 4 per cent per subscriber. Although price deflation has been problematic for some sectors of the telecom market, especially mobiles, increasing earnings margins highlights TPG is on the right track where efficiency is concerned.

The acquisition on its own will immediately be cash flow accretive according to TPG, adding an estimated $70 million to operating cash flows this financial year. Beyond the appealing rise in cash flows, it presents TPG an opportunity to cross sell existing offerings providing an ideal opportunity to increase revenues across existing core offerings.  

If cash flows increase as TPG have predicted, the acquisition will help bump up earnings in the year ahead.