It took me several days to finish reading the two merger documents. It has provided me with lots of insights into TPG, VHA and TPG Singapore.
Special Dividend Size
A few weeks ago, I guessed what the special dividend will be in this post:
https://hotcopper.com.au/threads/latest-tpg-updates.3910316/page-298?post_id=44502189
At that time I guessed that TPG will leave behind $100m in TPG Singapore. It turns out that TPG Singapore will get a further injection of S$170m (A$182m)
Assuming that the other assumptions are correct, then the size of the special dividend that we can expect is:
TPG Target Net Debt ($2508m) - TPG Current Net Debt ($1869m) + Further Debt Repayment ($150m) - Capital Injection into TPG Singapore ($182m) = $607m
or $607m / 928m shares = $0.65 per share fully franked
If TPG is able to make a debt repayment larger than $150m in this half, then of course the size of the special dividend will be even bigger.
Value of TPG Singapore
TPG Singapore will be distributed as an In-Specie dividend, the value of which will be determined as the VWAP of Tuas shares for the first five trading days.
To guess at what price the new TUA share will trade at, the only reasonable guess that I can use is looking at the book value of this new enterprise.
TUA will have an equity value of somewhere between S$500m - S$520m, or A$537m - A$558m. Per share, it is equivalent to around A$0.58 - A$0.60 per TPG share.
For every 2 TPG shares, we will receive 1 TUA share. Therefore there will be approximately 464m shares.
Therefore in theory TUA should trade between $1.16 - $1.20 per share.
However, considering that TPG Singapore is still in the early stage of commercialisation, and it carries a lot of risks associated with being a start-up and that there will be quite a few TPG shareholders who might not want to be exposed to a venture in Singapore, I suspect that when TUA starts trading, its share price will be lower than $1.16.
Expected Profitability Going Forward
MergedCo has a pro-forma combined EBITDA of around $1,976m, so let's round it up to $2,000m for ease of calculation.
Pro-forma Depreciation is around $800m and pro-forma amortisation is around $550m.
Therefore pro-forma EBIT will be around $650m.
MergedCo will have a net debt of $4,771m and the expected interest rate is 2.52%, so
the expected finance costs going forward is 2.52% x $4,771m = $120m.
This is the most important thing about the merger, i.e. the removal of $4b from VHA prior to merger. This combined with the newly negotiated low interest rate under the new debt facility, means that MergedCo's finance costs going forward will be a lot lower than TPG's and VHA's separate finance costs in the past.
Therefore, profit before tax is $650m - $120m = $530m
Tax is 30% x $530m = $159m. (This is non cash, as MergedCo will be able to utilise VHA's huge amount of tax losses to avoid paying tax for the next 5-10 years)
And profit after tax is $371m.
The new dividend policy is 50% of NPAT adding back one-off restructuring costs, certain non cash items, being customer base intangible amortisation, spectrum amortisation and non-cash tax expense.
Now, if we add back all of these non cash items, we get:
NPAT ($371m) + non-cash tax expense ($159m) + customer base intangible amortisation ($20m) + TPG spectrum amortisation ($107m) + VHA spectrum amortisation ($115m) = $772m
Therefore dividend amount will be 50% of $772m = $386m
MergedCo will have 1,859,341,669 shares, therefore
expected dividend per share is $386m / 1,859m = $0.21 / share.
Please note that the current share price of $7.80 will drop by the amount of special dividend and Singapore dividend when it goes ex-dividend.
Current share price ($7.80) - Special Dividend ($0.65) - Singapore Dividend ($0.60) = $6.55
To calculate the forward dividend yield, we need to divide $0.21 by $6.55 = 3.2%.
Please note this amount excludes any costs & revenue synergies that I'm pretty sure Teoh & Inaki will pursue very hard from the get go.
Note that Lonergan Edwards, the independent expert engaged by TPG, estimated that merger synergies can lift EBITDA of MergedCo by $200m, to be realised by FY2023 or FY2024.
Having followed TPG for a number of years and having observed TPG's track record in extracting both cost & revenue synergies from prior acquisitions such PIPE Networks, AAPT, iiNet, I'm very confident that MergedCo will be able to extract a lot of synergies going forward.
Ability to reduce debt quickly
Let's try to guess what the Free Cashflow will be:
Operating Cash Flow (assume the same as EBITDA) ($2 billion) - TPG Capex ($220m) - VHA Capex ($500m) - Interest Payments ($120m) - Dividend Payment ($386m) = $774m
To be conservative, let's bring this free cashflow estimate down to $700m.
This money can be used to repay debt and bring the gearing level to a more conservative level.
Summary
1. This merger deal is very advantageous to TPG. TPG is only contributing EBITDA of $735m vs VHA's contribution of $1,037m, or 41.5% vs 58.5% and yet the merger deal is 49.9% vs 50.01%.
2. TPG is able to convince the owners of VHA to assume $4 billion of VHA debt prior to the merger. This $4 billion has been spent by VHA over the past few years to upgrade its network. And now TPG is able to basically get half of this investment for nothing.
3. TPG is able to get out of its predicament of owning fast depreciating spectrum assets that it couldn't utilise. Now, this spectrum assets can be used to improve service and compete stronger against Telstra and Optus.
4. TPG is able to utilise its huge franking credit balance prior to merger by paying the Special Dividend and distributing the Singapore in-specie dividend to TPG shareholders
5. By structuring the deal so that VHA "takes over" TPG, the new MergedCo is able to fully utilise VHA's tax losses, which means that the MergedCo will not have to pay tax for the foreseeable future.
6. MergedCo will be able to generate a lot of free cashflow that can be used to repay debt relatively quickly or be used to invest in growth capital expenditure.
7. Going forward, MergedCo will become a company with higher dividend yield compared to TPG's current dividend yield. This will be a welcomed change for a lot of TPG shareholders who had to endure minuscule dividend yield over the past few years.
