I was given a copy of the SPT/TPG notice to shareholders yesterday by my father in law (who received it being a shareholder in SPT). It was a really interesting document if only because it provided the first 'public record' figures about TPG - and remarkable figures they are.
I don't know who Lonergan Edwards are - the 'author's of the report to shareholders, but I'm assuming they are reputable and competent. Some figures that are of interest would be:
Customer Base As At 30/6/07 (page 52)
ADSL2 - 82,582
ADSL1 - 78,294
Dial Up - 38,870
Strangely though, the total number of customers actualy decreased from 30/6/06 to 30/6/07 (from an average of 193,533 to an average of 187,226).
Advertising Spend Currently
$A300,000 per month
Last Dividend Paid (for FY2007)
$A18 million in November 2007
Not given as a figure but quoted as "reduced by approximately $A700,000 a year, despite headcount increasing by 20% due to opening of Manila call centre".
Jarring Notes In Balance Sheet
Current Assets - $A23.1 versus Current Liabilities - $A41.7
Cash = $A16.4 but pre-paid money = $A9.4
In section 90 on page 52 there is the most impressive set of figures which shows that TPG more than doubled its EBITDA from $A9.8 million to $A21.1 million from FY06 to FY07. Truly remarkable. But not as remarkable as the forecast EBITDA increase projected for FY2008 - up to $A48.5 million!!!
The reason for this massive projected increase (no customer growth was mentioned as far as I could see) also struck an even more jarring note - even more so than the balance sheet.
In explanatory note 104 (page 54) the reason given for this massive increase in profit was the ingenuous statement that:
"Thus, to a point,the incremental revenues from new subscribers predominantly flows through to EBITDA"
and also noted (must be a typo):
"..in the seven months to 31st December 2007 (? - odd accounting period) TPG achieved revenue and EBITDA of $28 milllion and $15.5 million respectively and is on track to achieve ts forecast FY08 EBITDA."
Obviously a company that achieves a revenue of $28 million in 7 months isn't going to achieve another $113 million in the next 5 months so either I've totally misunderstood this statement or it's been poorly proof read. However the authors of this report obviously believe that TPG has achieved the Holy Grail of business endeavour - they can add customers at no/little additional cost for the foreseeable future.
Gullible? Writers of such reports are seldom gullible. So they must have formed this conclusion on the advice from TPG that because TPG have now deployed SX IP bandwidth and dark fibre back hauls there in "no incremental cost" in adding new customers (of any number). Simplistically that could be so - as long as you have never operated an ISP and you haven't looked at the current situation with the ISP you are reporting on. For that explanation of the ability for TPG, or any ISP, to add customers with no additional infrastructure to be true it must presume that enough infrastructure is already deployed and being paid for that is sufficient to double the ADSL2 user base.
Looking at the Balance Sheet, TPG have included the 'purchase' of a 2.4 gbps SX IP link and dark fibre connecting their DSLAMs that could be 'lit' up to 10 gbps but isn't likely to have been 'lit' to more than 1 gbps on much/all of it at the moment. I can't possibly know any more than I read in the documentation so TPG may well be buying additional IP bandwidth from other sources - despite the implication that no more cost would be involved (which invalidates that assumption).
So does TPG really provide ADSL services to 160,000 customers on 2.4 gbps of IP bandwidth (It takes a little over 2.2 gbps of IP for Exetel to provide services to 55,000 ADSL customers). Maybe the TPG proxy/caching facilities are so comprehensive they can multiply the 2.4 gbps of direct feed into several multiples - that would be a working assumption. I'm sure that the auditors and report authors thoroughly researched those assumptions and, in any case, 30/6/08 is only a few months away when the accuracy of the forecasts will be determined by actual results.
So, a purchase price of $A250 million for a business generating almost $A50 million in EBITDA? A touch expensive but not really when/if you're also buying a business that has demonstrated the ability to double its EBITDA not once but by 30/6/08 twice in the last three financial years - no company in Australia has done that in recent memory.
Any downsides? Just one - if you're the buyer not the seller.
Just how long will ADSL2 continue to be viable given the fabled FTTN/FTTH and, more importantly, the affect of HSDPA and its successors on the Australian data service buyer. No point in paying five times current earnings if the earnings may in fact be non-existent in two years time.
(PS: and don't forget you also purchased the right to keep paying for the DSLAM, back haul and IP costs for up to another 11 years)
After reading this report I'm even more of the opinion that this definitely qualifies for inclusion on the list for the sale of the century.
TPG definitely have additional bandwidth sources. For example, they expose their PIPE peering points to every user on their network, not just users in that state.
All other public info lists PowerTel as TPG's network partner, both for their very impressive MPLS network and transit connectivity.
The fact Soul have their own MPLS network to migrate TPG's data onto(it's currently very underutilised) as well as massive VoIP-ideal infrastructure makes the deal very good value for the buyer.
As for the DSLAM costs, iiNet have made their view known on the question of moving away from DSL. Their expectation is that DSL will be replaced with another over-copper technology. The floor space they occupy is one of their most important "assets".