Today, I have exited $ABB, taking advantage of further exuberance this morning.

It was a finely balanced decision, but overall I have decided to maintain the discipline of adhering to my investment thesis.

In September and October 2022, having assessed that the market had completely over-reacted to the slowing resi growth, following the combination of $ABB and $OTW, I built a RL position in $ABB over 4 weeks at an average cost of $2.28/sh.

The thesis was simple: as an attacker with a strong customer focus, execution and reputation, having built its own fibre backbone to access high value markets, focused on the high margin segment, $ABB was stealing market share from incumbents at very attractive margins. Given the location of its network, and inevitable slowing Resi sales (as NBN buildout completed), it turned its focus to the higher margin Business, E&G and Wholesale markets. I epxected it to win here too.

My valuation was predicated on this focused attacker model, with strong growth in the business segments and continuing above-market growth in Resi, driven by its network and reputation. Valuation $4.50 ($3.67-$5.04)

With the announcement of $SYM, I eventually got comfortable that I could hold to the valuation, arguing that the $SYM customer base and product set MIGHT strengthen market positioning in the B, E&B and W/S segements. International was an open question for me, but I wasn't unduly concerned given it relative immateriality. I was also encouraged by what appeared from the outside to be the successful integration of $OTW, with the CEO retained as part of the management team, and good growth in all segments at the FY23 and 1HFY24.

I was concerned about the integration risk, but was prepared to give management the benefit of the doubt. While I didn't update my valuation, in my mind, the risk part of the equation was increased.

Now the low-ball offer for $SLC and the 20% stake, unsurprisingly dismissed out of hand. To me it seems inevitable that $ABB will come back with a significantly improved offer. They've taken the 20% stake, and as a minimum they want to get into a dataroom and do due diligence. And $SLC knows it, so they won't make it easy.

As discussed here yesterday, $SLC is a very different business with a large network of regional and international capacity. Is this complementary to $ABB or dilutive. I don't know. I don't understand the business logic of the combination.

Secondly, it is a bigger and even larger deal than $SYM. Management are going to have to focus on two successive integrations.

Again, while I haven't done a valuation, it is clear that NewCo will carry higher debt at c. $250m, the eventual price for $SLC will dilute $ABB (I've done a quick proforma which indicates NewCo ROE could be around 7.5% in FY24 before synergies, whereas $ABB is around 9%, even though it is possible it will be EPS accretive).

But what about the famous Aussie customer focus? There will potentially be a protracted period of change. $ABB has alrady said that it will run $SYM as standalone initially, So presumably that will apply to $SLC.

And what about Phil Britt? When Phil returned from long service leave a while ago, he said something quite telling, which I've never forgotten. They were words to the effect that he was considering his own future. Of course, after his leave he put everyone at ease but putting the question down, but it made me realise that while I have a lot of confidence in Phil, I don't really know that much about the rest of the bench, nor what the succession plan might look like.

These and other questions mean that I no longer have confidence in my valuation (above). The market gave me the opportunity this morning to cash in at $4.70, and given the risk-reward and the many question-marks in my mind, I decided to take the money.

So, I could be wrong, And I may well be. The NewCo combination might indeed benefit from the improved scale, talent, product suite and weight to attack B, E&G and W/S more vigorously, and accelerate the demise of the lumbering incumbents. But it will be a competitive fight, and what does that mean for margins in future?

So my thesis today is to maintain $ABB on my Watchlist. Who knows, after the combination is delivered (if it is delivered), we may see another SP stumble, like we did in OTW. At that point I will be able to value the NewCo on a solid set of numbers, and see if opportunity knocks once more, I'll be waiting.

-----------------------------------

As I wrote in my Straw when I first reported acquiring a stake in $ABB, I don't really like telco-land. But I am pleased it delivered over a 100% return in less than 18 months.

Farewell $ABB, Good luck. But, hey, I'm still a customer, so don't mess up!

Disc: No held in RL and SM