Commoditel (CMO) 3.9c Sonnet Corp (SNN) 16.5c JUNIOR telcos have promised much and delivered little in recent years, but investor interest is re-emerging as the virile players consolidate their position. For a caper based on simply buying wholesale time from a major and on-selling it under snazzy brands, it's surprisingly profitable. Criterion gathers that a 50 per cent gross margin is de rigeur for post-paid mobiles (and not much less for pre-paid deals).
This brings us to CommodiTel, which is in the throes of taking over mobile rival Sonnet in a friendly cash-scrip deal. Geoff Lord's investment bank Belgravia is a notable presence on the CommodiTel register.
CommodiTel chief David Sweet says the sector has been "hotting up" since Telecom NZ's AAPT arm took over Powertel for $350 million in May: "When the bigger ones join forces it creates the impetus for smaller ones to chat as well."
The merged business will end up with 150,000 customers. The beauty of re-selling is that most costs are fixed: after the first 35,000 customers or so, the extra revenues cascade to the bottom line. A key risk, though, is the absence of barriers to entry.
A year ago CommodiTel was a basket case, the result of giving away too many $20 pre-paid vouchers to Gen Yers who are about as loyal as a soccer star at contract renewal time.
Under new management, CommodiTel bought AAPT's pre-paid customer base in December 2005. It then bought Vodafone Australia's 20,000 strong post-paid list in October last year. This month, the company signed-off on buying AAPT's 35,000 post-paid customers for an undisclosed amount (three-fifths of diddly-squat). The business didn't fit the new strategy of Telecom-NZ, which only wanted a "good home" for its stray pup.
The merger joins CommidiTel's pre-paid oriented business (brands such as Revolution Telecom) with Sonnet's post-paid business (Reward Mobile). As these monikers suggest, the focus is on Gen Y users who love to chat: usually loudly, publicly and about their love life.
Mobiles are an attractive market because there are more than 20 million accounts: an average of more than one for every adult Australian. This compares with around 4 million internet connections.
However the merged group will have more than a weather eye on the convergence of mobile telephony and internet services such as VOIP calls.
"We are looking at all aspects of telecommunications," Sweet says.
CommodiTel already holds 78 per cent of Sonnet. To fund the cash component, CommodiTel is undergoing a one-for-10, non-renounceable issue at $2 apiece.
When all is done, CommodiTel will have a cumbersome 2.391 billion shares on issue, so expect a capital reduction.
CommodiTel made EBITDA of $284,000 in the half-year to December 2006 on revenues of $3.26 million, while Sonnet managed $315,000 on revenues of $7.8 million. CommodiTel also carries several million dollars of tax losses.
Sweet won't be pinned on earnings prospects, but one switched-on observer suggests the merged group could manage $13 million of EBITDA next year. This assumes $3 million of synergy-type savings, including curtailing CommodiTel's Perth base in favour of a Sydney HQ.
We rate CommodiTel a LONG-TERM BUY. There's an arbitrage opportunity via Sonnet shares to pick up CommodiTel shares at 3.15c apiece, a 19 per cent discount at yesterday's values.
CMO Price at posting:
0.0¢ Sentiment: Buy Disclosure: Not Held
