TPG Telecom (ASX:TPM) announced a fully underwritten institutional placement to raise $300m from institutional investors.
The proceeds will be used to repay debt that was accumulated following the acquisition of iiNet that was completed in September 2015. TPG established a number of debt facilities to pay for the acquisition and refinance iiNet’s debt arrangements.
The company announced that TPG’s total debt rose to $1.85bn following the acquisition. Gearing levels have increased substantially reaching 2.6x debt to EBITDA. TPG forecasts that gearing will decline to 2.2x after the capital raising.
New shares under the placement will rank equally with existing shares and the price will be determined via a bookbuild process. TPG seeks to raise capital from sophisticated and institutional investors with Macquarie as underwriter and bookrunner.
In addition a share purchase plan will be offered to existing TPG shareholders which allows shareholders to subscribe for up to $15,000 of new TPM shares.
TPM’s capital raising comes as no surprise as gearing levels have increased substantially following the iiNet acquisition. Wise-owl expects a solid take-up of the offer and the raising will probably not have a significant impact on the stock.
However, over the medium term investors should prepare for growth to slow down as TPM transitions from a growth stock to a ‘maturing company’. The stock has gained ~60% year-to-date and it increased fivefold in the past three years. The market values the TPM-iiNet synergy close to $10bn and is willing to pay a significant premium with the expectation of future earnings growth. TPM’s price to earnings ratio is in excess of 30 which is twice as much as the market average.
Based on these figures it would be hard to justify a ‘buy’ recommendation at current levels. Whilst there is little doubt that TPG’s management team has done many things right and growth will likely continue, it is fair to say that competition is high and the company faces additional operational challenges following the acquisition.