Purchased TPG Telecom (TPG) and Sold Washington H Soul Pattinson & Co. (SOL)
We have added TPG Telecom to the portfolios, funded by the sale of Soul Pattinson. The portfolios already had an indirect exposure to TPG through SOL’s 12.6% holding, which comprises more than 30% of SOL’s pre-tax net asset value. We have, however effectively switched this indirect exposure through SOL for a direct holding in TPG. This eliminates portfolio exposure to SOL’s more economically sensitive mix of investments and provides direct exposure to the consolidation of Australia’s telecommunications market under the merger of TPG and Vodafone Hutchison Australia. TPG has become the third largest telco in Australia to Telstra and Optus, while the merger has improved its product suite, competitive positioning and balance sheet. TPG’s management has proven capability as a disruptive competitor in the Australian market under the leadership of Executive Chairman David Teoh, who retains a 17.2% stake in the merged entity. The financial returns in the near term will be underpinned by cost synergies however in the medium term, the combination of TPG’s additional mobile spectrum and back haul capacity will enhance Vodafone’s network, while the eventual migration to 5G networks will bring greater ability to offer competitive fixed wireless broadband against NBN-based broadband services. TPG has experience in running the multi-brand strategies which should drive growth in its mobile and broadband market share (~16% and ~22% respectively) through attractive service offerings to different market segments. On FY22 forecast earnings TPG’s enterprise value to EBITDA ratio is less than 9 times while its net debt to EBITDA ratio should be less than 2x. TPG represents a medium term competitive growth proposition in a defensive market, which stands to benefit from increasingly price-sensitive consumers.