Across client accounts that have selected the “Growth” Australian Equity option, we have bought TPG Telecom (TPM). TPM is a telecommunications company that provides services for retail, wholesale and corporate customers across a range of telecommunications services including voice, internet and data solutions. In August 2018, TPM announced a proposed merger with Vodaphone Australia to establish a third major force in the Australian telecommunications market. Despite the ACCC raising concerns over the merger in December, we see the approval of the merger as still being more likely than not and this being a large positive for TPM and its growth prospects.

We are positive on the medium-term outlook for TPM for the following reasons:

• Full ownership and operating control of a ‘hard-to-replicate’ metro & national fibre network and dedicated dark fibre network allow high margins in the corporate segment which are not subject to NBN cost pressures;
• Proposed merger (pending regulatory approval) with Vodafone would bring together two highly complementary businesses, combining TPM’s fixed-line fibre infrastructure with Vodafone’s mobile network creates a platform for earnings growth as they cross-sell products and TPM’s cost management expertise is applied to form a lean competitive combined entity;
• Incremental margins to corporate and FTTB segment are very high given capacity and very little added fixed costs;
• The pending launch of their mobile network in the growth Asian market of Singapore in FY20 provides further growth potential with the company targeting market share of between 5 and 6% in the short term;

As with all investments it is not without risks. Were the ACCC to block the merger when they are due to hand down their decision in May, this would be a short term negative for TPM. Also, the continued roll out of the NBN will permanently reduce consumer broadband margins, unless there is a change to the structure of NBN Co and a reduction in access charges.

The purchase was funded from the sale of ANZ Bank. While we do not see a material deterioration in bank earnings, even in a post-Royal Commission environment of likely increased regulation, bank earnings are expected to grow at low single-digit pace at best for the foreseeable future. This has lead us to the conclusion that TPM is a better growth prospect given the tailwinds provided by technology advances and demographics in the Telecommunications sector.