Why TPG is set for a fall

TPG's plans to build its own fibre network have been embraced by investors. But the earnings assumptions are way off the mark.

Junior telco TPG (TPM), already considered to be priced at stratospheric levels, in the past week has seen a solid dose of the afterburner deliver it to places to which few enterprises have travelled before.

Last week, most analysts considered its $3.50 pricing a serious stretch. The company now is bobbing around $4.50.

There's no doubt the full year earnings, released last week, were a pleasant surprise. But the real buzz, the driving force behind the latest ascent, was its announcement that it would be rolling out its very own fibre optic cable – fibre to the basement or FTTB as we lovers of acronyms are wont to say.

It is a strategy that appears perfectly in tune with the new Federal Government's policy of providing competition on the new national fibre network rather than a monopoly owned and administered by the bureaucratic greyness of a government controlled NBN.

So it is understandable TPG's concept has been lapped up by investors.

But for one thing.

Whatever happened to the notion of structural separation between wholesale and retail?  Wasn't the NBN proposition from the Rudd Government primarily a reaction to Telstra's deliberate and ongoing campaign of undermining both the Howard and Rudd Government's broadband policy? 

Although largely forgotten, one of the fundamental aims of the NBN's establishment was to strengthen retail competition in the telecommunications industry. Prior to the NBN agreement, the vast bulk of the Federal Court's time appeared to be engaged in adjudicating on pricing disputes between Telstra and the competition regulator on behalf of telco retailers.

TPG's latest plans assume that the new government will allow a series of mini-Telstras with monopoly infrastructure and integrated retail services to spring up in specific locations, a concept that JP Morgan analysts this week labeled as dubious.

"We think FTTB should be valued as if it is wholesale only, which lowers the margin and expands the market size," they said. On that basis, TPG shares have overshot spectacularly and are destined for a fall.

And they are right. Structural separation has been a concept embraced around the telecommunications world.

The Coalition is committed to increasing competition nationally, not creating regional monopolies.

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