Sandstone Insights: TPG goes bush with Optus

ASX code: TPG

Suggestion: Buy

Need to know

• ACCC clears TPG/Optus regional network sharing agreement
• TPG to pay Optus $1.17 billion over 11 years for mobile site access extending TPG’s coverage to 98% of the population
• Regional customers the big winners.

Investment implications

A positive (expected) outcome for TPG as the regulator allows the regional network sharing agreement with Optus to proceed.

The 11-year agreement requires TPG to pay Optus A$1.17 billion and can be extended by TPG for another five years.

TPG will gain access to Optus’s 2,444 regional sites, almost doubling TPG’s national mobile network coverage in terms of area. This enables TPG to increase its customer base in regional and metropolitan areas and will help retain existing customers who need broader network coverage.

Improved service and increased competition

The shared regional network will use spectrum from both Optus and TPG, which will improve coverage and service quality for both sets of customers. This has the potential to create greater competition for Telstra (TLS).

TPG will recognise non-cash decommissioning costs relating to 755 network sites within the multi-operator core network (MOCN), amounting to A$230-250 million of non-cash charges in FY24.

EBITDA impacts and cost-saving measures in FY25

In FY25, TPG expects a negative EBITDA impact of approximately A$55-65 million for MOCN fees to Optus, operating expense savings, spectrum receipts from Optus, and some marketing expenses. This should be offset by a reduction of around A$50 million in capex.

TPG’s FY24 EBITDA guidance remains unchanged at A$1,950-2,025 million. We estimate that TPG will need to add around 120,000 mobile customers or grow the 5.4 million subscriber base by approximately 2% to break even on the deal (excluding the capex saving).

Investment view

TPG's previous deal with Telstra for a similar agreement was better but was blocked by the ACCC. The deal with Optus, while less transformational, is still a strong outcome for TPG.

Telstra still has greater coverage in regional Australia, but TPG will only need to add around 120,000-140,000 new customers to break even on this deal, thus limiting the risk.

TPG expects the MOCN will enable it to accelerate its mobile subscriber growth over time as a result of reduced churn and the increased addressable market. TPG expects the MOCN to break even in FY26, with a clear path to growth beyond.

Regional customers are arguably the biggest winners, as they will gain better service and coverage, and the additional competition may also lead to sharper pricing. Even so, the enhanced network should support TPG price rises and average revenue per user (ARPU) in 2025.

• _{The information provided by Sandstone Insights does not constitute investment advice and does not have regard to the specific needs of any person who may receive it. No warranty is given as to the accuracy or completeness of the information and any person acting on it does so entirely at their own risk.}