TPG Telecom (ASX: TPM) has revealed how it plans to use the wireless airwave spectrum it secured for $13.5 million in May 2013. The Australian Financial Review reports that executive chairman David Teoh wants to build a wireless broadband network in the major capital cities.
As I wrote yesterday, TPG plans to rapidly increase the number of buildings connected to its fibre-optic network, allowing the company to offer fibre plans to residential customers. Teoh has said that the company will utilise small cells connected to fibre backhaul for the wireless broadband. Therefore the wireless broadband offering and the residential fibre offering will likely share much of the same infrastructure.
TPG shares shot up over 20% in two days following the latest announcements. Although part of this move can be attributed to the strong results released on Monday, it seems that Teoh's vision for future growth is also playing a part. I can't help thinking that we are witnessing the implementation of a business plan dating back from TPG's 2010 acquisition of PIPE Networks, which owned metropolitan fibre networks.
Looking forward, TPG's wireless broadband plan could be a major blow to up and coming telecommunications company BigAir Group (ASX: BGL). BigAir owns and operates Australia's largest metropolitan fixed wireless broadband network, and sells to business customers. It has grown impressively over the last few years, but TPG will likely provide some serious competition.
With financial strength and marketing prowess, TPG has proven to be a threat to all competitors, with the possible exception of iiNet (ASX:IIN) in which it has a strategic investment. In 10 years, TPG has grown its market capitalization from about $400 million to over $3.3 billion today. The company generates strong cash flow, and boasts a debt-to-equity ratio of just 5.5%. TPG has the competitive advantage of scale and the ability to bundle services.
In contrast, BigAir Group has a market capitalization of just $123 million and just over $2 million in cash, with very little debt. It may be that TPG would acquire BigAir at the right price, but don't count on it. The smaller company currently trades on a price to earnings ratio of 23 and at 13.5 times cash flow.
Foolish takeaway
Once again, TPG Telecom has proven that it is an innovator in the telecommunications industry, and deserves a spot on your watchlist. Although I wouldn't buy shares amid all the current hype, the longer I study the telecommunications industry, the more I'm impressed with Teoh's strategic vision.
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Motley Fool contributor Claude Walker has an indirect interest in TPG Telecom through a managed fund. Find him on Twitter @claudedwalker.
