Like most mobile markets, Australia’s is an oligopoly:

Telstra sells its phones exclusively through stores that it operates itself. Historically, the other carriers have sold their phones partially through resellers, with Allphones being Australia’s largest such reseller.

In 2013, however, Optus (which owns both the Optus and Virgin Mobile brands) elected to pull its phones from re-sellers and switch over to a company-store model. The results weren’t great:

The dotted lines bookend the period over which Optus pulled its brands from resellers. The withdrawal strategy seems to have been half-baked, as Optus began pulling its phones from resellers before it had completed the construction of its own national retail store base, thereby leaving geographical pockets in which Optus had no retail presence. The company lost subscribers. Not long after the phase-out was complete, the Optus CEO left the company.

This move was costly for Optus, but it was really costly for Allphones/ Glentel. Optus was a 70% customer of Allphones, and Allphones hasn’t been able to replace enough of that lost revenue to remain profitable, even with strengthened relationships with Vodafone and the smaller carriers and fast-growing MVNOs. Allphones’ same-store sales are down double-digits despite significant store closures, and the segment as a whole is roughly breakeven on an EBITDA basis, compared to $18.5M of EBITDA at the time of acquisition.

So Glentel’s Australian business isn’t contributing much to the bottom line at the moment. Will it ever?

Well, first of all, there is decent a chance that the existing Allphones business could return to profitability. Despite losing Optus, Glentel has managed to limit the Allphones same-store sales declines to 10-15% by paring the store base from 200+ down the 130. This has enabled Allphones to hover around EBITDA breakeven. Unfortunately, at the end of the 2013 Allphones will lose another 45 stores from Optus (these will be the last), and I’m guessing at that point Allphones will start losing a little bit of money, though not a lot. From there, the company will have to rely on further growth with Vodafone, and perhaps some new MVNOs, to try to get back to breakeven, or possibility profitability.

Second, there is a chance that Optus, now under new management, reverses course and allows its phones back into Allphones stores. Optus appears committed to its exclusive-store plan (it has already spent the money), but if the company continues to have problems adding or keeping subscribers, coming back to Glentel might not be out of the question. Even if this happens, Allphones will probably never fully recover the revenue it has lost, since going forward it will be competing with Optus’ new company-run stores. But that doesn’t mean there might not be enough recovered revenue to push Allphones back into the black.

I think Glentel’s approach to Allphones at this point is best described as “wait and see.” In a few years, the company will know whether or not A) its non-Optus relationships generate enough revenue to sustain the business, and B) Optus decides to put its brands back in Allphones stores.

Finally, and most promisingly, there is the Philippines venture housed within the Australian subsidiary. Glentel is acting as a franchisor of the Allphones brand—as well as an IT/software provider—for up to 250 multi-carrier stores in the Philippines. With a population three times as large as Canada, but with much lower smartphone penetration, the opportunity is large. Glentel hasn’t yet provided any financial projections for this venture, however. Since the GDP per capita there is about 1/20^th what it is in North America, I don’t think the stores hold much promise for meaningful profitability any time soon. The bigger opportunity is down the road, as purchasing power improves and the company expands into other parts of Asia.

Time will tell how this stuff pans out. My base investment case ascribes no value to the Australian subsidiary, but I certainly don’t mind the free options, especially given management’s long history of largely successful growth.

Up next: normalized earnings, valuation, risks, and further opportunities.