After thinking about this carefully and researching this as...

After thinking about this carefully and researching this as deeply as possible for the last few weeks, I have come to form the view that VTG is materially undervalued at current prices, because it is almost certain that VTG will in the reasonably short term, end up having significantly more cash on hand than its current market cap!

Let me explain.

As we all know, TLS has stated that it has a clear strategy of running its own retail network.

With regard to VTG, there are obviously 2 options.

Let it run for the next four years as contracted, or do a deal sooner rather than later.

My analysis suggests that it would be cheaper for TLS to do a deal sooner rather than later, as opposed to letting it run for the next four years.

More importantly however, doing a deal will be immediately earnings accretive for TLS, will be cheap for TLS relative to it’s own valuation, and will align with their strategic T22 plan. So I’m fairly certain that the TLS executives in charge of this, are well motivated to make it happen.

From the latest TLS half year report “we have made non binding indicative offers to certain licensees to acquire their stores”.

So TLS is out there negotiating, and buying back stores right now. Would they just buy some and not VTG? Unlikely I’d say..

And from the latest VTG half year report “VTG and TLS have entered discussions to ensure that the transition arrangements are suitable for both parties, shareholders and team members. VTG is working collaboratively with TLS to finalise these arrangements as soon as possible””

So on balance, a deal is highly likely.

What will TLS pay??

Well, I think the best guidance here is to consider what is fair and reasonable, or market value for the stores?

If TLS DON’T pay market value, can you imagine the fun that the regulators would have with that?

The store owners’ lawyers (not just VTG) would be claiming abuse of market power before you could count to 3!

And why risk a traumatic transition anyways?

It’s absolutely in TLS’s interest, to deliver a smooth and amicable transition, for multiple reasons.

So what is market value?

We can look at VTG’s recent transactions, and poke around a bit, and it's pretty clear that market value would be somewhere around 2.5-3 times EBITDA.

VTG’s most recent ICT store acquisition was at circa 2.85 times EBITDA.

Let’s stay conservative and let’s say that a deal is done at 2.5 times EBITDA, for all of VTG’s retail Telstra stores.

The first point to make here, is that for TLS, that would be cheap!

TLS’s market cap is circa 10 times EBITDA..

So super simplistically, if they can add $200M a year in EBITDA (by buying back all 270 odd stores), at a cost of $600M (let’s say the 2.5 times EBITDA, becomes 3 times EBITDA by the time we include all transaction and project costs) they would add $2Billion in market cap, ceteris paribus! And make no mistake, TLS is absolutely on the hunt for EBITDA at the moment.

The champagne would be flowing freely in the TLS boardroom, if they could add $200M in EBITDA for circa $600M...

So it’s a no brainer for TLS.

What would that look like for VTG?

The stores make somewhere between 80-85 M a year in EBITDA.

Let’s stay conservative.

80 times 2.5 is $200Million…..

They will cop some CGT on that, circa $25M.

But they have $35M + on hand right now..

Conclusion: I am almost certain that VTG in the near future, will have well over $200M cash in the bank, which is well in excess of the current market cap.

Hence, it looks to me like VTG is materially undervalued, and a very attractive proposition.

With respect to the remaining business, I note that the SHAW business generates half the revenues, and half of the GP that SLA generates… and SLA has a market cap of over $200M…

Of course, DYOR…..

Happy to discuss this at length: the above is really the short version!

Happy investing all.