The Telstra Corporation Ltd (ASX: TLS) share price is in focus after an agreement with TPG Telecom Ltd (ASX: TPG) for regional network sharing.
TPG is responsible for several telco brands including Vodafone, TPG, iiNet, Internode, Lebara and AAPT.
Telstra and TPG regional network agreement
Telstra and TPG shares are in focus after announcing a ten-year regional multi-operator core network (MOCN) commercial agreement which will provide TPG’s subscribers with 4G and 5G services within a defined coverage zone across regional and urban fringe areas.
How is it going to work?
TPG will gain access to around 3,700 of Telstra’s mobile network assets. Its current 4G coverage will increase from approximately 96% to around 98.8% of the population.
Telstra will obtain access to and deploy infrastructure on up to 169 of TPG’s existing mobile sites.
TPG is going to decommission around 725 mobile sites it currently operates within the MCN coverage area.
TPG will provide Telstra with access to some of its existing 4G and 5G spectrum to use in the regional network.
What this means for TPG and Telstra
Compared with TPG’s current arrangements, there will be no material increase in total network costs. The 98.8% population coverage will be achieved at a significantly lower cost than building an equivalent network.
TPG will also be able to win customers within this MOCN coverage area and customers who rely on regional mobile coverage. TPG will save on capital expenditure and operating costs for the decommissioned regional sites, as well as the sites that would have been needed to grow its coverage. The telco will also get spectrum payments from Telstra.
TPG is expecting the benefits to materially offset the costs of the agreement, as well as the impact of decommissioning costs (up to $50 million). But TPG will recognise one-off accounting impacts of onerous lease-related charges of up to $150 million and a write down of the value of network infrastructure of up to $75 million.
Telstra said the deal would provide “significant value” to shareholders. The extra spectrum means that customers get faster speeds in more locations – this will be helpful as more people moving to regional areas means there’s congestion in some areas, particularly at busy times.
Telstra said that it would make a “very significant contribution” to Telstra’s wholesale mobile revenue.
My thoughts on the Telstra share price and TPG share price
The last year has seen a divergent performance. Over the last year, the Telstra share price has gone up 21%, but the TPG share price is down 16%.
Value investors might say that there’s an opportunity with TPG – it looks cheap, even if you allow for a bit of a premium on Telstra.
The fact that a major competitor is going to use Telstra infrastructure is a clear sign of how far ahead Telstra is.
I’ve been impressed by the moves Telstra has made, such as the acquisition of Digicel Pacific and the expansion of Telstra Health. Telstra Energy could soon be a useful bonus too. At the moment, I’d prefer Telstra for the long-term because of the better dividend yield, strong market position and more earnings diversification.
