What Is TPG Doing In 4G?

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-TPG surprises with spectrum buy
-Telstra scores the bigger slice
-What will TPG do?
 

By Eva Brocklehurst

The latest Australian auction for 4G spectrum produced some surprises. On offer was spectrum in the 700Mhz and 2.5Ghz bands. Telstra ((TLS)) and Optus ((SGT)) were obvious bidders, but TPG Telecom ((TPM)) put its oar in and scooped up two 10Mhz tranches of the 2.5Ghz spectrum. Vodafone ((HTA)) had indicated it would not bid in the 700Mhz band, saying it had enough to meet needs, and withdrew from the auction. Telstra gained most of the offering, spending $1.3 billion to acquire spectrum in the 700Mhz and 2.5Ghz band. Optus spent $649m and TPG spent $13.5m. The 700Mhz was sold at the reserve price and 2.5Ghz sold marginally above reserve.

Now brokers are asking what TPG is planning. Higher frequency spectrum is likely to be used for mobile broadband. Credit Suisse does not see the acquisition as a strategic fit for the junior telco, quoting the experience of VividWireless and the trouble building a standalone mobile broadband network in Australia, particularly in high frequency bands where in-building coverage is weaker. The broker thinks building a mobile network is a risky strategy and is curious to see what TPG does with its purchase.

BA-Merrill Lynch thinks there could be a risk of a return to a four-player market, noting TPG has around 300,000 mobile subscribers, wholesaled by Optus, or 1% of the market share. Any aggressive network roll-out could lead to revenue compression for the entire industry, although the capex outlay would be substantial and, therefore, this is not a number one option in the broker's view. Citi holds a suspicion that TPG could be just camping on the spectrum as "option value".

JP Morgan does not think TPG, on its own, is considering a role as a fourth wireless player. Therefore, the most logical option is to joint venture with one of the others. TPG could offer a fixed wireless broadband focused on niche markets, perhaps student accommodation. High frequency spectrum would work for this but it's unlikely to be of high enough worth. Rolling out fixed wireless broadband from scratch is also risky in JP Morgan's view. The NBN will, in due course, provide similar or higher speeds and there is not much evidence of a customer base for TPG in this regard.

So, this leads back to contemplating a full wireless network in joint venture. JP Morgan rules out Telstra and thinks the player with most to gain would be Vodafone. Vodafone is constrained by a lack of fibre backhaul to cell sites. JP Morgan understands only about 30-40% of its sites have fibre, compared with 93% for Telstra. While emphasising it's all speculation, the broker does observe that Vodafone has track record of pursuing joint ventures in fixed line assets, while fixed-line players such as TPG face a more competitive landscape as the NBN rolls out. JP Morgan also considers the same possibility that Citi has flagged, citing examples of potential new entrants buying spectrum and then thinking better of it and selling it down the track. Committing just $13.5m suggests TPG's plans are not yet concrete.

Optus bought as expected. Credit Suisse thinks its strategy of buying less low frequency spectrum than Telstra carries risk. The broker queries the longer-term network coverage disadvantage that Optus may suffer in not holding low frequency to the same extent and the potential capital inefficiency that comes form deploying a more high frequency network. Merrill Lynch thinks the spending on spectrum could constrain Telstra's dividend growth. The outlay was slightly ahead of the broker's assumption of a $1.1bn spend.

JP Morgan does not think it confirms the dominance of Telstra in mobile. Dominating the 700Mhz spectrum is a mixed blessing in metro areas where cell density is set to grow. It could simply be that Telstra has 50% more customers than Optus and therefore needs more spectrum. The argument that Optus' holding in that band is light on is too simplistic, in JP Morgan's view. The broker thinks the high reserve price altered the economic trade-off between spectrum and other capacity solutions.

Unsold spectrum is likely to be returned to the market in the next two or three years. ACMA has stated it should not be assumed it will come back to market at lower price in the near term. The spectrum is worth $1 billion to the government so it's likely to be sold as soon as possible and where it ends up could have important implications for competition in the longer term. Brokers are watching with interest.
 

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