MTU - M2 Group

[craft]

Time for MTU to walk away from IIN. TPM’s revised offer is 9.9 EV/EBITDA. In my opinion MTU can’t trump that without incurring significant risk and departing significantly from acquisition discipline that has served it well in the past.

Consolidating smaller enterprises like most recently, the call plus business brought at a 5.6 EV/EBITDA is what has produced this result.





Good as the ride has been if MTU gets sucked into a bidding war and overpays for IIN my faith in management will be blown and we will part ways.

Even if the real objective was to get TPM to pay more - another round of Russian roulette is not in order here, there's more reward to be obtained focusing back internally. If IIN is really too cheap for its size and strategic importance - let SGT be the fly in TPM's ointment. (or is SGT already the puppet master behind the MTU bid?)

 

[Ves]

I don't think there ever was a realistic chance that MTU could swallow IIN, because TPM has all the trump cards up their sleeves.

For instance, and this hasn't needed to happen, if MTU made an offer TPM didn't want to match, TPM have the financial capability to buy a blocking stake on the market (see VOC / AMM). MTU do not have the balance sheet to use this strategy.

TPM is an interesting business, and I admit, until recently I didn't study it in much detail, but I think they have a lot to gain by purchasing IIN. TPM is a lot more vertically integrated than MTU because they own their own network infrastructure, so I'd assume that they could also take a lot of costs out of IIN's business. In my opinion their operational leverage is greater because they don't need to pay wholesale costs. (PS: still trying to work out how much of this cost advantage will carry over to the post-NBN world - because the potential for Telstra / Optus / TPG - to start margin wars with their lower cost bases is a very real threat in the eventual end-game when broadband penetration reaches critical mass IMO).

I did make some early posts on this thread re post-NBN themes for MTU, but starting to realise that more research is required.

 

[Ves]

What interests me about MTU (other than it's a highly cash generative, capital light, compounding machine) is their apparent ability to maintain really low churn rates as a reseller. This will be a very handy asset as the NBN (in whatever form it takes) ramps up over the next five or ten years, as other players have to rebrand as resellers due to the centralisation of ownership of the infrastructure. If there is a larger shift from infrastructure players to a higher focus on reselling and marketing, those with the lowest cost structures and people capability will be the biggest benefactors. I also see that management has been astutely diversifying their revenue streams (electricity is the newest) whilst keeping to their core advantages and competencies.

I have bolded the part from this previous post that I am now questioning.

 

[craft]

I don't think there ever was a realistic chance that MTU could swallow IIN, because TPM has all the trump cards up their sleeves.

For instance, and this hasn't needed to happen, if MTU made an offer TPM didn't want to match, TPM have the financial capability to buy a blocking stake on the market (see VOC / AMM). MTU do not have the balance sheet to use this strategy.

TPM is an interesting business, and I admit, until recently I didn't study it in much detail, but I think they have a lot to gain by purchasing IIN. TPM is a lot more vertically integrated than MTU because they own their own network infrastructure, so I'd assume that they could also take a lot of costs out of IIN's business. In my opinion their operational leverage is greater because they don't need to pay wholesale costs. (PS: still trying to work out how much of this cost advantage will carry over to the post-NBN world - because the potential for Telstra / Optus / TPG - to start margin wars with their lower cost bases is a very real threat in the eventual end-game when broadband penetration reaches critical mass IMO).

I did make some early posts on this thread re post-NBN themes for MTU, but starting to realise that more research is required.

Hi Ves

I agree MTU has not got the clout to take on TPM and IIN is very important to TPM.

Optus (SGT) is the wild card here IMO.

This is not logically MTU’s fight unless SGT is pulling the strings.

 

[Ves]

This is not logically MTU’s fight unless SGT is pulling the strings.

What's your reasoning to think that SGT might be pulling MTU's strings?

 

[craft]

What's your reasoning to think that SGT might be pulling MTU's strings?

Because If I was Singapore Telecom and was serious about the position of the optus business in Australia I would want both MTU and IIN and it would be nice to acquire them as one. I would not want TPG to have either.

IIN and MTU are both infrastructure light reseller businesses, stand alone they are just challenger brands. But purchased by someone with financial clout and they provide an immediate seat at the NBN table as a major reseller.

Are Optus prepared to allow TPM to be a third major in addition to Telstra? Are SGT even interested in a post NBN Aus?

Don’t get misled by the SGT capitalisation on the ASX – they are as big as TLS.

 

[Ves]

I agree, SGT is a massive company.

They're in a lot of Asian jurisdictions (I think total NPAT is around $5b), and the board has to weigh up whether money invested in Australia is better than the returns they can get elsewhere in Asia.

The longer the bidding drags out, the more it probably suits SingTel, as I assume their board would take longer to decide as their is more dynamics to consider for them.

In that sense, what you said above is pretty feasible. M2 Group is a reseller for Optus in Australia, so they definitely do talk.

 

[So_Cynical]

Because If I was Singapore Telecom and was serious about the position of the optus business in Australia I would want both MTU and IIN and it would be nice to acquire them as one. I would not want TPG to have either.

The above makes a lot of sense, i thought it was strange for Sing tel to just do nothing and see its position and market share slip...as an IIN holder im also happy that now i have the option of getting some TPG shares instead of all cash, 75c FF divi will be nice as well.

 

[Ves]

Optus' comments in their quarterly results yesterday appear to indicate that they're not interested in pursuing IIN as part of their strategy. They seem to be focusing on increasing the capital spend in their mobile & fixed network to take Telstra on head to head (and anyone else obviously).

It's quite telling that these big firms are spending a heap of capital on building infrastructure - despite the NBN.

Barring a surprise new entrant to the bidding, it looks as if TPM will now control IIN, as I wouldn't expect MTU to bid again based on their historical purchase multiples for acquisitions (nor would I want them to).

http://www.brisbanetimes.com.au/bus...g-in-battle-with-telstra-20150514-gh1t9w.html

On a side note, the dynamics surrounding the NBN are more complicated than it first appears: from my research it appears that it is widely misunderstood by the public and investors alike (which isn't helped by the constant changes both politically and the conflicting noise between commercial interests).

 

[craft]

Optus' comments in their quarterly results yesterday appear to indicate that they're not interested in pursuing IIN as part of their strategy. They seem to be focusing on increasing the capital spend in their mobile & fixed network to take Telstra on head to head (and anyone else obviously).

It's quite telling that these big firms are spending a heap of capital on building infrastructure - despite the NBN.

Barring a surprise new entrant to the bidding, it looks as if TPM will now control IIN, as I wouldn't expect MTU to bid again based on their historical purchase multiples for acquisitions (nor would I want them to).

http://www.brisbanetimes.com.au/bus...g-in-battle-with-telstra-20150514-gh1t9w.html

On a side note, the dynamics surrounding the NBN are more complicated than it first appears: from my research it appears that it is widely misunderstood by the public and investors alike (which isn't helped by the constant changes both politically and the conflicting noise between commercial interests).

Interesting - what's the plan?

The potential purchase of iiNet by TPG Telecom for $1.56 billion would create Australia's second-largest fixed-line internet provider. But Mr Lew said Optus had a plan to deal with the situation.
"Clearly, if they get together they'll be the number two player but for us the primary focus still remains mobile," he said.

"But we believe that with the number of customers we have on the fixed platform today at 1.03 million customers we have the scale … to benefit from the national broadband network and have a profitable business."

The focus may be mobile - but will they accept becoming number 3 in fixed especially as driving up ARPU by packaging is the name of the game. I suspect not - but is the plan to acquire market share (MTU?) or can we expect a margin war to win business organically?

 

[Ves]

The focus may be mobile - but will they accept becoming number 3 in fixed especially as driving up ARPU by packaging is the name of the game. I suspect not - but is the plan to acquire market share (MTU?) or can we expect a margin war to win business organically?

There's a few themes here. If you own your own infrastructure you don't have to deal with anyone else. This is important because shifting data from A to B costs money. If you don't own the cables then you have to pay to use them. If you do own them you'll have higher margins (if you have the scale and also much greater operating leverage). Also think Fibre to the Basement vs NBN.

Telstra, Optus and TPM definitely fit in this bracket, and I think you'll find that they actually co-operate with each other a bit with shared access. And, if anything, the NBN enhances what they already have.

Yes, the NBN does level the playing field (mainly in the retail sector), but as it only adds 123 nodes (or close to) it obviously doesn't cover every single patch of dirt or city street.

Who owns the cables that link Australia to the rest of the world? What about the inter city cables? How much does access to these cost?

There's also the fact that companies still need some infrastructure to connect to the NBN. Can every ISP afford to build the "plug in" to the nodes? What happens if they can't? What are their options and what does this mean for margins?

NBN Co is a wholesaler. So they'll be selling blocks to ISPs in big chunks. How much scale do you need to cost effectively buy these blocks from NBN Co and then on-sell the access to your customers? What happens if the blocks are in bigger data chunks than your customers actually use? The key here is that you cannot buy part blocks from NBN Co, as far as I see it. So where do you buy them? Again think margins.... those with scale vs those who don't.

Another question to ponder: why are some companies offering unlimited broadband plans and some aren't?

Telstra, Optus and TPM (and a few others like Vocus / Ammcom) have also been building networks that are much faster than the NBN, which corporates are using (check out TPM's growth in the corporate sector, for instance). These fall outside of the bounds of the NBN, so my understanding is that it'll have no impact. As big data grows, the companies with this infrastructure will make all the money.

I don't see a price war between TPM / Optus / Telstra. They own more cables than anyone else, so they'll keep doing what they are already doing and profit on the fact that others need to access them (whilst maintaining as much exclusive access for themselves as possible) which will help them control / win a lot of the market that they don't already own. There doesn't need to be a price war for a long time IMO, because there's still heaps of low-hanging fruit for them to enjoy (increasing user penetration / weaker competitors).

 

[craft]

I don't see a price war between TPM / Optus / Telstra.

Nice post Ves but big picture I tend to disagree with how the consolidation of the industry now it has reached the bigger end will eventually play out.

Two's company - Three's a crowd.

I'm talking about major's - there will always be multiple niche and smaller challenger businesses.

 

[McLovin]

Also think Fibre to the Basement vs NBN.

What are the broader economics of allowing private companies to cherry pick densely populated areas in the capital cities in terms of being able to deliver reasonably priced internet Australia wide, as the NBN (a government owned enterprise) aims to do?

I guess what I'm asking is how likely is it that the government will introduce legislation that limits competition to its own network?

 

[Ves]

Nice post Ves but big picture I tend to disagree with how the consolidation of the industry now it has reached the bigger end will eventually play out.

Two's company - Three's a crowd.

I'm talking about major's - there will always be multiple niche and smaller challenger businesses.

Genuine question... do elephants in competitive industries metaphorically stamp their feet (more) whilst the industry is still expanding, or does it become more intense when the industry reaches maturity?

The only reason for that question is that I don't think we are any where near maturity in the Australian telecommunications market.

 

[Ves]

What are the broader economics of allowing private companies to cherry pick densely populated areas in the capital cities in terms of being able to deliver reasonably priced internet Australia wide, as the NBN (a government owned enterprise) aims to do?

I guess what I'm asking is how likely is it that the government will introduce legislation that limits competition to its own network?

At the moment there is legislation on this for FTTB and competing with the NBN Co. I think it's called a Carrier License Condition (CLC). It's not easy to get your head around it, but it revolves around having separate entities for wholesale and retail.

Here's an AFR article:

http://www.afr.com/business/telecom...bring-back-fibretothebasement-20150106-12irpt

Mr Turnbull’s new rules require TPG to split its wholesale and retail *divisions selling access to its high-speed network by July 1, and introduce *separate directors, staff and support systems.

It will only be allowed to charge rivals the same price that it charges its own retail division.

That article was about the events in early January 2015.

NBN Co also previously tried to bring a case against TPG for violating this "anti-cherry picking" legislation and the ACCC said that this wasn't violated in that case. Not sure if that was under the "old" rules or the "new" rules as they appear to have changed since December 2014's announcement by the government (see above).

Subsequent to January 2015 TPG went away and in under two months this news appeared:

http://www.businessspectator.com.au/article/2015/2/20/technology/tpg-back-its-fibre-horse

They're already back selling and claiming to have met the new conditions.

Just another dynamic. So many moving parts to watch going forward.

I don't think the government can limit (ie. stop) other networks (you know those with better technology) without actually buying them for market price.

 

[craft]

Genuine question... do elephants in competitive industries metaphorically stamp their feet (more) whilst the industry is still expanding, or does it become more intense when the industry reaches maturity?

The only reason for that question is that I don't think we are any where near maturity in the Australian telecommunications market.

When does an elephant move – when it damn well wants too would be my guess.

In house joke in our family that I don’t know squat about elephants. My youngest daughter shot of a serious of quick fire questions at me the other day including “how do elephants drink water” and I got done like a dinner when I said with their trunks

 

[skc]

When does an elephant move – when it damn well wants too would be my guess.

In house joke in our family that I don’t know squat about elephants. My youngest daughter shot of a serious of quick fire questions at me the other day including “how do elephants drink water” and I got done like a dinner when I said with their trunks

Buy this for her birthday.

 

[craft]

Buy this for her birthday.

View attachment 62586

SKC you're a legend - I so have to get that, she would love it.

 

[McLovin]

Thanks for the post, Ves. Digging around a little deeper it seems as though the government has slowly been changing from a monopoly service provider with a universal pricing scheme to one that will be forced to compete and will have some autonomy in setting wholesale pricing. It does seem as though the government will be using other providers networks to subsidise the rollout of wireless and satellite. They euphemistically refer to it as an "industry contribution mechanism". I will not be guessing at how well that will work.

So many moving parts to watch going forward.

Yeah, it was all so much simpler when TLS just owned everything.

When the whole NBN thing kicked off, I thought it would be much simpler with NBN becoming like a new Telecom, but it's anything but.

 

[VSntchr]

M2 definitely under-performing the market since the release of the FY15 accounts. The result looked pretty good to me and guidance was fairly solid. They did speak about competition intensifying....but as the low cost provider - wouldn't this result in MTU gaining a bit of a preference over TPG? Doesn't seem to be the case as TPG is holding up alot better in the last few days.