Telstra snaps up Digicel with $1.3B government assist

In perhaps the most unusual deal of the year, Telstra is to acquire Pacific operator Digicel with some generous backing from the Australian government.

Telstra will take the biggest Pacific Islands telco off the hands of Irish businessman Denis O'Brien for $1.6 billion, of which government-owned Export Finance Australia (EFA) will contribute $1.33 billion.

Sold: Telstra has finally bought Digicel - with help from the Australian government.  (Source: Rafael Ben-Ari / Alamy Stock Photo)
Sold: Telstra has finally bought Digicel – with help from the Australian government.
(Source: Rafael Ben-Ari / Alamy Stock Photo)

It is a win for Telstra CEO Andy Penn, who had made it clear the company had no interest in acquiring an uneconomic asset.

Win, win

For its equity contribution of $270 million, Telstra gets hold of a business that exceeds all of its M&A criteria and that last year generated $233 million in EBITDA.

Digicel Pacific provides mobile and broadband services in Papua New Guinea, and mobile services in Nauru, Samoa, Vanuatu, Tonga and Fiji. It has approximately 2.5 million customers.

Telstra describes Digicel as "a unique and very attractive commercial opportunity for Telstra to boost our presence in the region."

On completion of the transaction, expected in early 2022, Digicel will be run as a 100%-owned separate business within Telstra's international division.

It is a departure from Telstra's strategy of not investing in retail businesses offshore.

O'Brien, the major shareholder in privately held Digicel Group, has been shopping the asset around for almost a year as he tries to shed debt.

Reportedly some private equity firms who were brought in on the sale had told Canberra that Chinese firms were also eyeing the asset.

It's clear now no Chinese entity had any serious interest in Digicel, but Australian and US governments were determined Digicel should remain in friendly hands.

Both governments have been active in winnowing out Chinese influence in the subsea cable sector in recent years, with the US blocking multiple China-linked cables and the Australian government funding an alternative South Pacific cable that excluded Huawei. But this is their first intervention in retail telecoms.

In so doing, Australian authorities have taken a page out of China's playbook. China's giant Belt Road Initiative (BRI) infrastructure plan is built on the close partnership between state-owned enterprises (SOEs), government banks and private industry.

The Digicel acquisition, combining government funds with private sector expertise, has been lauded by Australian commentators as a blueprint for how western governments can counter China's economic expansion.

Friends in high places

For Telstra, the new asset won't move the needle on its bottom line, although the stock ticked up 2.14% in Monday trading.

But it will ensure Telstra execs a warm welcome among officials in Canberra who may be deciding, among other things, whether to allow them to acquire the NBN business some time in the near future. The company described the deal as "an important milestone" in its relationship with the government.

The sale is also a win for Denis O'Brien, who played the China card astutely.

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Others are no doubt noting his success in coaxing an anxious government to take an asset off his hands, yet – in the telecommunications business at least – such opportunities are limited.

Digicel, straddling multiple small markets across a strategically sensitive region, is unusual. It's hard to think of anywhere else in the world where vital telecom assets are vulnerable to acquisition by a deep-pocketed foreign power.

But the deal does signal that this is a very different era in global telecoms.

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— Robert Clark, contributing editor, special to Light Reading

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