Telenet announced yesterday during trading that, together with the Walloon cable operator VOO, it has acquired 2G and 3G mobile spectrum.
Telenet and VOO were the only bidders, and as a result got the spectrum for the minimum price, or € 71.5m for the 3G spectrum (covering the period 2011 – 2021) and € 31.5m for the 2G spectrum (available as from 2015 and also running till 2021).
Telenet expects the total cost it will bear (including the licence fees but for example also usage fees paid to the BIPT) to be about € 11.4m per annum on average over the 2011- 2020 period. For the 2011-2014 period the costs will be around € 8m pa, and this will increase to around € 13.8m pa as of 2015 when Telenet also starts paying for the 2G spectrum.
It seems highly unlikely that Telenet would build its own mobile network. We expect Telenet to continue to work with existing mobile network operators to exploit the acquired spectrum. Telenet currently has an MVNO agreement with Mobistar, and the acquired spectrum should allow Telenet to negotiate better MVNO conditions with Mobistar we believe. This would not require additional investments by Telenet. If Mobistar and Telenet would not come to a new agreement, Telenet could always turn to the third Belgian operator Base (KPN Belgium).
Next to this advantage, Telenet also rightfully believes it will be in a stronger position if and when mobile spectrum would become a scarce resource in Belgium. This is currently not yet the case as the penetration of mobile internet remains limited, but the growing adoption of mobile internet could obviously change this. In this scenario, Telenet would be in a weak position as an MVNO operator without own spectrum.
The € 11.4m average annual cost is quite limited compared to total annual capex (close to € 300m this year) and FCF (> € 250m), but it is nevertheless clear that Telenet will need further growth in its mobile activities in order to generate a return on this investment. At end-1Q11, Telenet had 211k mobile customers (or about a 2% market share). Telenet admitted in the 1Q conf call that mobile subscribers are below their own expectations although revenues are in line thanks to a high ARPU of the mobile clients. We estimate mobile revenues were about € 40m in FY10, or 3% of total sales.
Overall, we do not think that Telenet acquiring mobile spectrum will substantially alter the competitive landscape in Belgian mobile, as Telenet is already active through its MVNO agreement with Mobistar, and we expect both parties to continue the cooperation, at more favourable terms to Telenet however. This nevertheless also means that competitive pressure in mobile will be slightly higher going forward (especially in mobile data, which is the segment Telenet is focussing on), and this is slightly negative for the other mobile operators.
No changes to our investment case, we reiterate our Accumulate rating and € 34 target on Telenet. Telenet will publish 2Q results on 28 July after market. The ex date for the € 4.5 ps capital reduction is 26 July.