TPG considers bid for AAPT

Telecom New Zealand has reportedly pushed back another deadline on bids for its subsidiary AAPT, with acquisition-hungry TPG said to be undertaking forensic due diligence over the next week.

Analysts say the deal would continue the trend of consolidation within the telco sector, as second-tier companies eye acquisitions in order to build scale before the rollout of the National Broadband Network.

The report in the Australian Financial Review comes just days after it was suggested TPG was targeting AAPT due to its 18% stake in iiNet. Additionally, it was reported TPG was also after Amcom Telecommunications, which holds a 20% stake in the Perth-based ISP.

TPG, run by the reclusive David Teoh, is certainly no stranger to acquisitions as it bought Pipe Networks last year for $375 million.

TPG is recording solid growth. Revenue was $241.5 million for the first half of the 2010 year, with EBITDA of $77.1 million and net profit after tax of $27.5 million – representing 443% growth.

Subscriber growth was 54% in the six months to December 31, with many joining to take advantage of the company’s ultra-cheap deals offering unusually high download limits. Analysts say TPG could be targeting further growth in order to take on industry leaders Telstra and Optus.

Daniel Blair, telecommunications analyst at Southern Cross Equities, and former AAPT employee, says an acquisition would “have its challenges” but would deliver solid benefits for TPG. One of these would include its Powertel wholesale network, which counts Macquarie Telecom as a large customer.

“AAPT has a bit of a checkered past, but is beginning to turn the corner a little bit. I think TPG is probably going to extract the most synergy out of the companies standing in queue.”

However, Blair says AAPT is split into three divisions and each have their own concerns. As a whole, the company forecasts a revenue drop of 28% for the three years to 2011.

Blair says TPG’s debt is “also a consideration”. The company has over $430 million in debt, but the AFR reports Teoh has already lined up a new financing deal.

“The debt is being paid down quickly given the cash accretion in the business, but it is a consideration to take into account.”

Blair suggests the company could sell for over $400 million, but he insists that figure is only a rough estimate due to the separate divisions within the business, and the uncertainty as to what particular section TPG is targeting.

Nevertheless, Blair says an acquisition could deliver solid benefits and it would make sense given the imminent rollout of the NBN.

Telsyte research director Foad Fadaghi says a number of companies will now consider acquisitions and mergers due to the maturation of the market – it has a number of different second-tier providers, but none have enough scale to take on leaders Optus and Telstra.

“This has been a trend that’s been happening for many years. It signifies a maturing market, and you expect this type of activity where there is a lot of saturation. It’s really growth triggered by acquisitions.”

“But this really has more to do with the NBN. Today most ISPs sell a similar product, but with the NBN it will be even more so because there will be less choice for ISPs.”

Fadaghi says telcos will no longer be able to compete on speed, as they might have done so during the previous 10 years. Now, they will have to compete with customer service excellence and product bundles.

“The competitive factors are going to change because the infrastructure for all of them will be standard. What we’ll see is more companies offering bundles with phones, videos, and those sorts of deals. What we’re seeing right now is the start of that activity.”