Vodafone gets wired
Vodafone Australia and TPG Telecom Limited (ASX: TPM) yesterday announced a circa $1 billion deal for the rollout of 4,000 km’s of dark fibre around Australia.
The agreement will allow Vodafone to link up it’s circa 3,000 mobile towers across Australia. This will enable the carrier to advance later in the decade into offering 5G mobile broadband services, a requirement for future competition with Telstra Corporation Limited (ASX: TLS) & Singtel Optus Pty Limited (SI: Z74).
In a nutshell, using fibre as part of the network allows for virtually unlimited bandwidth capacity, i.e. faster speeds, improved latency and better overall network performance. If this can actually be achieved, it could alleviate Vodafone of its legacy customer churn issues.
The deal is great for TPG, the firm essentially receives 4,000 km of dark fibre fully paid for as well as a customer increasing its spend by $60 million per annum (roughly a 10 per cent boost to TPG’s current corporate services revenues). In addition, TPG will be able to offer dark fibre services to new and existing clients on additional fibre strands laid alongside those laid for Vodafone.
EBITDA margins for fibre services are often in the 50-70 per cent range (over 90 per cent on an incremental basis) and hence are highly value accretive. TPG’s financial statements don’t provide this level of detail on their dark fibre margins however estimates north of 40 per cent do not appear unrealistic.
In addition, TPG will offer it’s circa 320 000 mobile customers the option to migrate to the Vodafone network from its wholesale provider Optus. Provided the network can perform for these customers, it’s a plus for both entities.
Scott Shuttleworth is an analyst at Montgomery Investment Management. To invest with Montgomery domestically and globally, find out more.
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