TPG Telecom plans new mobile network, pays $1.3bn in spectrum auction

TPG Telecom plans a $2bn network to become Australia’s fourth mobile operator, after a big spectrum purchase.

TPG Telecom founder David Teoh

TPG Telecom has unveiled plans to build a $2 billion mobile network, with the telco raising $400 million from the market to become the fourth mobile operator in Australia.

TPG, which operates fibre-optic networks offering broadband and communications services, plans to spend about $600 million to roll out a network over three years and expects to achieve 80 per cent population coverage.

The long-awaited mobile play from TPG (TPM) comes after it splashed out $1.3 billion to pick up two lots of crucial spectrums at the latest 700 MHz spectrum auction, which has delivered a total windfall of nearly $1.6 billion to the federal government.

The final auction figure blows the reserve price of around $857 million out of the water and it’s an outcome delivered entirely by TPG breaking the bank to buy the spectrum.

Industry sources told The Australian the purchase is the most expensive spectrum buy in recent history.

TPG has secured 2 x 10 MHz for $1.3 billion, while Vodafone Hutchison Australia has picked up 2 x 5 MHz for $286m.

The telco’s boss David Teoh hailed the buy as a landmark moment for the company’s future in Australia.

“We are uniquely positioned to leverage our success in the Australian fixed-line broadband market to drive the next phase of growth for TPG’s shareholders and bring new competition to the Australian mobile market,” he said in a statement.

“We believe that our mobile strategy will be complementary to our ongoing fixed line business, with the ability to bundle mobile and fixed services expected to have a beneficial effect on our already low fixed services.”

Mr Teoh flagged TPG’s potential entry in the mobile race last year, citing the need for more competition in the market.

However its move to pay $1.26 billion has caught the industry by surprise.

It has also spooked Telstra’s shareholders, with the incumbent telco’s shares down 6 per cent at the open. With its mobile margins thinning the entry of a cost-competitive mobile player like TPG is widely expected to put the squeeze on Telstra.

The telco picked up 2×20 MHz of the 700 MHz spectrum band across Australia, as well as 2×40 MHz pairs of spectrum in the 2.5GHz spectrum band for $1.3bn in the 2013 auction. However, it was prevented from participating in the latest auction.

TPG picked spectrum in the 700 MHz and 2.5 GHz bands in the 2013 auction but was not expected to have the ammunition to compete against Vodafone and Optus this time around.

Goldman Sachs analyst Kane Hannan said last week that a combination of time constraints and an immediate focus on building a metro-focused mobile network was likely to see TPG pass on the opportunity.

TPG, which is already building a mobile business in Singapore, also indicated last month that it wasn’t keen on raising fresh capital to fund its bid.

TPG has now changed its tune, with the telco saying that it will now spend $600m to roll out a network over the next three years to cover 80 per cent of the population. The $1.3bn bill for the spectrum will be paid in three annual instalments. The spectrum licence commences from April 1 2018 and expires on December 31 2029.

The network will be funded by a combination of existing and new debt facilities and operating cash flow as well as the $400 million raising at a fixed price of $5.25 per new share. TPG’s major shareholders David Teoh and Washington H Soul Pattinson have pre-committed to take up their full pro-rata entitlements of $138m and $101m respectively.

Meanwhile Vodafone, which was widely seen as the frontrunner in the spectrum race, has bought 2 x 5 MHz of spectrum at $1.25 per MHz, per head of population. The acquisition is on the same terms VHA proposed to government in 2015 and the telco has also renewed its s2100 MHz spectrum holding for $544 million, including 2 x 25 MHz in Sydney and Melbourne.

“Certainty over the 2100 MHz spectrum further reduces the need for incremental spectrum in the next few years,” the telco said.

“In metropolitan areas, we now have the second largest metropolitan low-band spectrum holding, and the largest holdings in the key 1800 MHz and 2100 MHz bands.”

Optus which was also competing, failed to pick up any spectrum, with a company spokeswoman saying the telco was unwilling to secure it any cost.

“We need the spectrum but not at that price.”

The successful auction finally puts to rest the 700 MHz spectrum, crucial for 4G mobile services, left over from the original “digital dividend” auction, which failed to deliver the desired results.

The Australian Communications and Media Authority, which conducted the auction, said the entire process had run without fault.

“The sale of the remaining unallocated portion of the 700 MHz ‘digital dividend’ spectrum brings an important chapter in Australian economic reform to a successful close,” acting ACMA chairman Richard Bean said.

“It completes the digital dividend process begun in the 1990s, with the progressive conversion of free-to-air television from analog to digital technology enabling much better TV and a massive boost to high-speed wireless broadband in Australia.”