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TPG Telecom Ltd (ASX: TPG) witnessed a 5.31% surge in its share price to AU$4.36 apiece on Monday following the announcement of a significant regional network sharing agreement with Optus. The collaboration aims to establish a regional multi-operator core network (MOCN) to expand TPG Telecom's 4G and 5G mobile networks across Australia.
This strategic move comes after TPG's earlier attempt to collaborate with Telstra Group Ltd (ASX:TLS), which was thwarted by the ACCC. By joining forces with Optus, TPG is set to significantly enhance its mobile network coverage, reaching approximately 98.4% of the population.
Expansion of Network Coverage
Under the agreement, TPG's number of regional mobile sites is expected to more than triple, reaching 2,444 sites. This expansion will effectively double the geographic coverage area from 400,000 square kilometers to around 1 million square kilometers. Additionally, TPG will gain access to the Optus 5G regional network as it continues to roll out.
Benefits for Consumers and Businesses
All brands under the ASX telco share, including Vodafone, TPG, iiNet, Lebara, and felix, are poised to benefit from this network sharing agreement. Customers can expect improved service quality and speeds for voice, data, SMS, fixed wireless, and Internet of Things (IoT) services, catering to both consumer and enterprise-grade needs.
Financial Implications
The agreement is expected to result in significant cost savings for TPG Telecom. By avoiding future operating and capital expenditures, the company estimates cumulative gross cash cost savings ranging from AU$575 million to AU$675 million over the 11-year term. However, TPG will pay approximately AU$1.17 billion to Optus over the same period, representing around one-third of the costs it would have incurred to build and maintain a similar network independently.
Despite the long-term benefits, TPG anticipates non-cash charges of AU$230 million to AU$250 million in FY24 related to the network sites within the MOCN area. However, there will be no change to the earnings before interest, tax, depreciation, and amortization (EBITDA) guidance for FY24.
In FY25, EBITDA is expected to be impacted by AU$55 million to AU$65 million, primarily due to MOCN fees to Optus. This will be partly offset by a AU$50 million reduction in capital expenditure requirements. Additionally, a negative net profit after tax (NPAT) impact of approximately AU$10 million to AU$20 million is forecasted for FY25.
Despite short-term profit impacts, TPG anticipates the MOCN arrangement to achieve break-even in cash terms from FY26 onwards. Moreover, the enhanced mobile network is expected to drive subscriber growth over time, potentially benefiting TPG shares in the long run. If approved by regulators, the regional MOCN is slated to be operational from early 2025, marking a significant milestone for TPG Telecom Ltd.
