TPSA: Willing to separate fixed arm?

According to the cover story of today’s edition of Dziennik Gazeta Prawna, TPSA (6,86 PLN, 2,24%) has hired advisors to monitor the possibility of separating the fixedline business from the firm's mobile structures. The daily says the separation would be made with the intention of creating a wholesale fixedline operator that would be open for cooperation with all interested third parties on Poland’s telco market. In addition, the article suggests TPSA’s fixed-line business could be entirely sold and run by an external wholesale operator (e.g. Ericsson (12,81 USD, 0,51%) or Emitel), or could be owned and operated by a consortium of firms (e.g. TPSA-Polkomtel-PTC-P4). According to the daily, TPSA has yet to reach a final decision on separating its fixed business. TPSA refused to comment on the speculation.

Our view:
The separation of TPSA’s fixed-line business and the establishment of a universal wholesale fixed-line operator could tangibly change the overall picture on Poland’s telco market.

• From TPSA's side, the disposal of the fixed-line arm would be a serious cash injection and would allow for the financing of all necessary spectrum purchases (new/renew) and deleveraging. In addition, the firm would improve its growth profile with the shift to the mobile business only, which has better prospects. However, this would occur at the expense of lower fixed business margins in the future. Even so, the separation of the fixed-line business could be very positive for TPSA from the business point of view.

• From the regulator's point of view, such a move could allow for more efficient use of the existing fixed-line infrastructure, more efficient investments and a quicker upgrade to fibre networks; even more importantly for the regulator, the change would allow for an increase in fixed broadband penetration (e.g. through the more common fixed broadband-mobile voice bundles), a more complete offer for end-clients and potentially lower prices.

• From the point of view of other mobile network operators, such a move could allow the offer of more attractive bundles, lower the churn rates and would stabilize the overall mobile market.

• The change could be negative for Plus and Midas as LTE-fixed broadband substitution would probably be lower in the future due to the higher availability of fixed broadband-based bundles on the market.

• The news could be negative for Netia and cable TVs as all MNOs would suddenly be able to offer fixed-mobile bundles, which are more attractive than the average Netia and CATV offers, which have only a limited mobile offer. On the other hand, both Netia and CATVs would gain access to TPSA’s entire fixed-line base, potentially at wholesale rates below the present rates.

• From the valuation point of view, TPSA’s fixed arm generated PLN 2.7bn of EBITDA in 2012. Assuming a further deterioration of EBITDA going forward and assuming a fair EV/EBITDA multiple of 3.5x to 4.0x for such a business, this would mean TPSA’s fixed-line business could be worth (for TPSA) PLN 8.0bn-10.0bn on a debt-free basis. As a consequence, if the whole story materializes, we would envisage a consortium of new owners (i.e. all MNOs, Emitel and some other firms) rather than one buyer and operator.

Overall, the news is rather theoretical at this stage but could have some positive impact on TPSA’s stock price today.