​This TAMIM SPV was established to invest in just one company, amaysim Australia Ltd (AYS.ASX). No, the ‘a’ is not supposed to be capitalised in amaysim’s case.  AYS is Australia’s largest mobile virtual network operator (MVNO) and is also the fourth largest mobile subscriber base in the country with 1.2m customers, but importantly 850k contracted subscribers.

AYS, as a MVNO, utilizes the Optus mobile network. A MVNO is essentially a marketing company that helps mobile carriers fill up capacity on their networks in order to get a return on their large infrastructure investment. AYS owns its customers and its brand. AYS has a network service agreement (NSA) with Optus which expires in June 2022. At that point AYS can take their customers to another network if they chose to.

​MVNOs are very common and every competitive mobile market around the world has them. For a MVNO, in order to make a financial return you need significant scale. From time to time a MVNO becomes extremely successful and even a dominant player in its industry. AYS is such a case. This leads to profitability and strong cash generation.

In FY20 AYS’ Mobile division generated $191m revenues and $10m in EBITDA. As MVNOs become large and a meaningful part of any given carrier’s subscriber base, their NSAs become very strategic assets and valuable to their network partner or other carriers in the market. AYS’ contracted subscriber base is now 8% of Optus’ 10.5m subscribers and their only growth channel.

​In a sense, Optus simply can’t afford to lose the AYS contract in 2022. It is this unique situation that we saw as an opportunity and a catalyst for AYS to potentially be taken over. Although Optus is the natural owner of AYS, it is not too difficult to switch mobile subscribers onto another network and so AYS is a very attractive MVNO for the other players, including Telstra (18m subscribers) and Vodafone (now TPG with 5.4m subscribers).

​As we researched the entire global MVNO industry, we noticed that most players that have hit scale get acquired at this point of their evolution. The reason being that the carrier cost of a MVNO is the revenues and margins to a carrier. In FY20, AYS generated Optus $100m in revenues and this year we estimate that AYS will generate $140m in carrier revenues which, by our analysis, is 70-80% increments EBITDA margin to Optus or $100m EBITDA (Singtel is Optus’ parent company).

Singtel, TPG and the like currently trade on 10x EV/EBITDA multiples, hence AYS is arguably worth $1bn in market cap to either of these incumbents. We believe that AYS is the last remaining opportunity in Australia for a carrier to simply grab 850,000 contracted mobile subscribers in one hit and thus add significant profitability right away.

This can happen through a couple of avenues. The first is simply an improved NSA agreement, which AYS has tendered out, or an acquisition of AYS or AYS’ Mobile business. The initial thesis presented to our investors estimated that an acquisition attempt would take place within six months of the SPV’s launch. It ended up taking less than four weeks…

The current situation has Optus offering to buy the AYS Mobile business. The sale is for $250m and is not, we believe, on favourable terms to investors. An outright scheme for AYS would be more attractive. The current offer will see AYS distribute approximately 84 cents (including franking) after costs and taxes to investors. On our entry prices, that is an approximate 25% return over an estimated nine month time frame – not bad but not good enough.

We believe this is an opportunistic offer by Optus and sets the scene for other players such as Telstra, TPG, or even the likes of supermarket chains and AGL to make competing bids or even just match the offer as a scheme. In any scenario, Optus can’t afford to lose AYS’s subscribers and Telstra and Vodafone/TPG can’t afford to pass on the opportunity to grow their subscribers by 5% and 15% respectively. Optus will have to match or counter bid. Either way, we see AYS’ worth well north of $1.00 per share and, with the AYS EGM slated for January 2021, we anticipate a bidding war emerging in the next couple of months.

Watch this space!

Disclaimer: TAMIM has a position in AYS.