Aussie telcos: tapping our growing appetite for data

Market insights

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.

Our preference

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.

This article is part of our From the desk series, featuring monthly insights from the Macquarie High Conviction Fund and the Macquarie Australian Small Companies Fund team members.


Related solutions

Managed funds

Share this

Related articles


Find out how we can help

If you'd like to speak to a specialist about how we can help build your business, get in touch.

This information has been prepared by Macquarie Investment Management Limited ABN 66 002 867 003, AFSL 237492 ("MIML"), the issuer of units in the Funds mentioned above and is current as at May 2015.The information in this email is provided for general information purposes only and does not take into account the investment objectives, financial situation or needs of any person. It should not be relied upon in determining whether to invest in a fund. In deciding whether to acquire or continue to hold an investment in a Fund, investors should consider the product disclosure statement. The product disclosure statement is available from MIML by phoning 1800 814 523.

Future results are impossible to predict. This report includes opinions, estimates and other forward-looking statements, which are, by their very nature, subject to various risks and uncertainties. Actual events or results may differ materially, positively or negatively, from those reflected or contemplated in such forward-looking statements. Forward-looking statements constitute our judgement as at the date of preparation of this report and are subject to change without notice.

Investments in a Fund are not deposits with or other liabilities of Macquarie Bank Limited or of any other Macquarie Group entity and are subject to investment risk, including possible delays in repayment and loss of income and capital invested. None of Macquarie Bank Limited or any other member of the Macquarie Group guarantees any particular rate of return or the performance of a Fund, nor do they guarantee the repayment of capital from a Fund.

1 Source: Australian Communications and Media Authority, 2015

Except for Macquarie Bank Limited ABN 46 008 583 542 AFSL and Australian Credit Licence 237502 (MBL), any Macquarie entity referred to on this page is not an authorised deposit-taking institution for the purposes of the Banking Act 1959 (Cth). That entity's obligations do not represent deposits or other liabilities of MBL. MBL does not guarantee or otherwise provide assurance in respect of the obligations of that entity, unless noted otherwise.