VTG has just been kicked in the guts by TLS and yet this announcement still sounds apologetic to TLS.
Maxine Horne commented, “We are prepared to partner with Telstra to address broader market challenges. We have performed strongly, creating value for Telstra over many years and intend to continue doing so into the future. We are well versed in managing remuneration change as the market evolves and as products and services go through their lifecycles. However we are concerned about the extent of these changes and are currently addressing these concerns with Telstra, along with other commercial constructs. We are very aware of concerns over recent adverse movements in our share price and are working hard to restore investor confidence in our relationship with Telstra. We will provide updates as soon as we can and in the meantime, thank our shareholders and other partners for their patience.”
"We are prepared to partner with Telstra" = "I've been robbed of my pocket money by the school bully but I still want to be friends with him"
"currently addressing these concerns with Telstra" = "I'll try and talk to the bully again to see if he can stop beating me up after school"
Note that today's announcement refers to TLS' intentions to reduce remuneration by 10% per year for the next 3 financial years. There is no guarantee that this is as worst as it gets. I imagine that if TLS faces tougher condition that it envisages, it will look for VTG again and ask for more margins to be returned.
The worst thing about being in a lopsided relationship such as this is the junior partner will always be in a state of worry. If VTG doesn't perform, then TLS will kick it away and won't renew its contract. On the other hand, if VTG performs very well like in the past couple of years, TLS will ask for a bigger slice of the available margins. Unfortunately, going forward, whether VTG likes it or not, it is bounded to a life of mediocrity.
And then we still have the biggest question mark of all - whether the contract will be renewed in 2020, which hasn't been addressed in this announcement. No matter how small this possibility is, after the recent course of events, a prudent investor should take this into consideration in deciding whether or not to now enter, exit completely, increase or decrease his/her holdings.
For me, there is simply too much uncertainty and I also strongly believe that VTG's business model is very inferior, therefore, I won't be tempted to buy VTG at any price.
Based on my experience, when bad news like this happens, the best loss to take is the first one, i.e. get out immediately at first chance. Hanging around and doubling down is similar to subjecting oneself to death by thousand cuts.
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