Over the past month, M2 Group Ltd (ASX:MTU) and TPG Telecom Ltd (ASX:TPM) have announced the significant acquisitions of Call Plus Group and iiNet Limited (ASX:IIN), respectively. With the fixed telecommunications market already in the midst of massive changes as a result of the National Broadband Network, shareholders may be reconsidering this new environment to assess which companies offer the best value and growth prospects.
M2 Group has been a market darling of late, with the company's shares doubling over the past year. Although this means the shares are no longer the bargain they were 12 months ago, the market cheered the group's acquisition of Call Plus Group this week.
The acquisition of New Zealand's third largest Internet Service Provider is expected to boost M2's profits by adding NZ$45 million in earnings before interest, taxation, depreciation and amortisation (EBITDA) in financial year 2016. In February, M2 reported a 25% rise in half year net profit, demonstrating the strength of its existing businesses including Dodo and iPrimus.
I believe M2 remains a quality investment as its Australian operations continue to grow and the international expansion provides both diversification in earnings and additional growth opportunities.
TPG Telecom's planned acquisition of iiNet will enable the combined entity to become Australia's second largest ISP. It also provides TPG with a significant footprint in the expanding NBN market and will create synergies that should enable lower costs.
TPG recently announced a half-year profit of $106.7 million, up 18% from a year earlier. The company also forecast EBITDA growth of 32% for the full year. While the future looks bright for TPG, I would advocate holding off on buying shares until the iiNet deal is complete as there has been some disharmony from iiNet shareholders and speculation that rival telcos such as Singtel Optus or even M2 Group may spark a bidding war.
Given the rise in TPG's share price since the iiNet announcement, the market may sell off the shares if the deal was to fall through.
The largest company in the Australian telco space, Telstra Corporation Ltd (ASX:TLS) retains its lead as the biggest provider of fixed telecommunications services in Australia, but may face increased competition as a result of the TPG/iiNet merger and M2 Group's continued growth.
Telstra, however, has reduced its reliance on its traditional revenue source over recent years. Mobiles have been the greatest income driver for Telstra, with postpaid handheld revenue increasing 8% to $2.7 billion in the most recent half year.
Telstra has also diversified its earnings with the purchase of Pacnet, the world's largest submarine cable owner, and expansion into health and network applications and services.
Add in Telstra's famed dividend, yielding 4.85% at current prices, and you have an overall package that investors love, driving the share price to decade highs. It remains to be seen whether Telstra has the quality to push the share price higher still, but until investors can earn decent income from non-share investments, this popular yield play is likely to have limited downside.
