Tuesday 21 April 2015
Aussie telcos: tapping our growing appetite for data
Tuesday 21 April 2015
Australians' growing appetite for movies, streaming television and live gaming is driving exponential growth in the amount of data we consume. To put this in perspective our fixed-line data downloads have increased by over 50% in the past 12 months alone and almost 100% via mobile handsets!1 With the National Broadband Network (NBN) also rolling out, there seems little reason to think this growing demand for data will slow down any time soon.
New entrants and rapid consolidation
This growing demand has not only created opportunities for the established telcos, such as Telstra and Optus; it has also attracted new companies with innovative ways to service customers. Over the last five years however, many of these smaller 'challenger' telcos have been acquired by their larger peers as they lacked the scale to maintain adequate levels of profitability and, product and customer service innovation to remain competitive.
Who's buying whom?
The major acquirers to this point have been: TPG Telecom, M2 Group, Vocus Communications, iiNet and Amcom Telecommunications. In an interesting twist, and perhaps a sign of things to come, iiNet and Amcom have themselves fallen subject to takeover offers in recent months.
Our recent analysis indicates that acquirers are not only buying bigger companies but they are paying higher prices for them. The key drivers are:
- Continual growth in data consumption.
- Free cash flow generation for mature and maturing telcos is strong and steady, enhancing deal financing while debt is cheap.
- Acquiring subscribers can be easier than organically growing them.
- Synergies can be large – there is often spare data capacity and utilisation can be increased in a merger or acquisition.
- Competition concerns in some spaces (for example, fixed-line internet) are reducing the number of large deals.
Notwithstanding the likelihood of further corporate consolidation, investing is not without its risks. We believe that any company should be investable on its own merit, rather than being premised on corporate activity. With this in mind, we have identified two companies that we believe offer an attractive exposure to the telco market - namely Vocus Communications and Chorus NZ.
- Vocus has rolled out fibre infrastructure in capital cities across Australia since listing in 2010. By securing long-term access to data capacity, Vocus is uniquely positioned to sell its capacity and increase utilisation in a fast growing market. We believe Vocus can also become a legitimate competitor to Telstra in the corporate telco market.
- Chorus has been charged with rolling out the majority of New Zealand's version of the NBN (known as the 'Ultra-Fast Broadband Network'). While the company's service pricing is regulated, Chorus will enjoy a very strong free cash flow and dividend yield over the coming years (and probably longer) which we believe is not yet factored in to its share price.