Everybody Hurts as Australia Gets Yet Another Mobile NetworkBy
TPG Telecom to spend $1.4 billion to be fourth mobile player
Telstra, Optus and Vodafone will all take a hit: Macquarie
The planned launch of yet another mobile phone operator in Australia is set to hurt every provider already in the market, as well as the new entrant that’s spending almost A$1.9 billion ($1.4 billion) to take them on, analysts said.
TPG Telecom Ltd., best known for its broadband services, said Wednesday it will build its own cellular network for A$600 million after spending A$1.26 billion on airwave licenses. The move would make it the country’s fourth provider, pitting it against former monopoly Telstra Corp., Singapore Telecommunications Ltd.’s Optus and a venture owned by Vodafone Group Plc and Hutchison Telecommunications Australia Ltd.
Competition will be especially keen for prepaid customers, hurting Optus and Vodafone even more than market leader Telstra initially, Macquarie Group Ltd. analysts said. For Telstra, the fresh threat also weakens its ability to sustain dividend payments, according to the bank. Mobile services accounted for 40 percent of Telstra’s earnings in the last six-month period.
“TPG’s entry hits where it hurts,” Macquarie’s analysts said in a report. They reduced their 2024 earnings estimate for Telstra’s mobile business by 14 percent and said “the entry of TPG brings further headwinds to the longer-term growth outlook for this division.”
Telstra said TPG’s investment shows Australia has a “strong and competitive” mobile market. Optus declined to comment.
Telstra shares extended declines on Thursday, falling 1.4 percent at the close after Wednesday’s 7.5 percent slump. The decline since TPG announced its plans has wiped A$4.8 billion from Telstra’s market value. TPG stock remained halted for a A$400 million rights offer to help fund its plan. SingTel was down 1 percent in Singapore after a 1.6 percent decline Wednesday.
The last time Australia had four separate operators, the situation didn’t last. Vodafone and Hutchison each ran independent operations until 2009, but opted to merge their businesses to achieve competitive scale.
TPG, led by billionaire chairman David Teoh, is targeting a slice of an Australian mobile-phone market that generates as much as A$8 billion in earnings and profit margins as wide as 50 percent, according to Morgan Stanley.
Teoh plans to reach 80 percent of Australia’s population over a three-year network rollout. But the company will struggle to win and hang on to customers because it’s spending so little on its network, the equivalent of only A$100 million on each major city, First NZ Capital Securities Ltd. said in a report.
TPG didn’t immediately respond to an emailed request for comment.
The scale of investment suggests TPG’s services will be “materially inferior” to its rivals and there’s a high risk the company will have to spend more than expected on its network, First NZ said.
Vodafone spends at a faster rate in Australia just keeping its own network going, Chief Strategy Officer Dan Lloyd said in a statement. It’s tough to build one from scratch because Australia is large and sparsely populated, while phone-tower sites are expensive and hard to secure, he said.
Even without a cost blowout, TPG’s investment will push debt levels close to covenant limits, First NZ said. That means there’s little room to spend more on the network to offer next-generation services or buy additional spectrum, First NZ said.