TPG Telecom (TPG) - Capital management on agenda

TPG Telecom provides mobile and fixed-line telecommunications services to consumers and small- to medium-sized businesses, principally through its Vodafone Australia, TPG, iiNet, Internode, Lebara, AAPT and felix brands.

TPG has sold its fibre network infrastructure assets and its fixed-line enterprise, government and wholesale business to the unlisted Macquarie-controlled Vocus Group, for $5.25 billion. The sale leaves TPG with its Vodafone Australia mobile operation and its fixed-line consumer and small business division, which will ease back network capacity from Vocus. The company will use expected net proceeds of $4.65–4.75 billion to return capital to shareholders and for investment in its mobile business, although details are yet to be provided.

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In Ord Minnett’s view, TPG would have capacity for capital management of circa $1 billion after debt reduction of $3.7 billion (which is our base case). Post the sale, we have downgraded our recommendation to Accumulate from Buy on valuation ground, and our target price to $5.25 from$5.50. There is upside on offer, particularly if our estimate of capital management is too low, but we also note potential overhang risks given the company’s convoluted shareholder structure and history.

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