Telstra and Australian government buy Digicel Pacific for $1.85 billion

After a protracted courtship Australian operator group Telstra is buying into six south Pacific markets in a move viewed as a counter to China’s influence in the region.

Back in July former state telecoms monopoly Telstra confirmed it was working with the Aussie government to try to get hold of Digicel’s Pacific operations. While now fully privatized it’s clear Telstra still has strong ties to the Australian state, which in turn is increasingly worried about China’s regional ambitions. Once it became clear that Digicel was willing to sell it seems the matter became as much a geopolitical as a commercial one.

Now we learn that the Aussie taxpayer is fronting nearly all the cash, even though Telstra will own 100% of the resulting shares. Nice work if you can get it. The basic purchase price is US$1.6 billion, with $250 million extra after three years so long as everything goes according to plan. Of the up-front price Telstra is only having to find $270 million, with the state paying the rest. While China isn’t specifically mentioned it’s clear that’s the reason the Aussie government is suddenly so keen on telecoms M&A.

‘Chief Executive Officer, Andrew Penn, said Telstra was initially approached by the Australian Government to provide technical advice in relation to Digicel Pacific and subsequently considered acquiring the business with financial and strategic risk management support from the Government,’ explained the press release.

“Digicel Pacific is a commercially attractive asset and critical to telecommunications in the region,” said Penn. “The Australian Government is strongly committed to supporting quality private sector investment infrastructure in the Pacific region. We previously said that if Telstra were to proceed with a transaction it would be with financial and strategic risk management support from the Government.

“We also said that in addition to a Government funding and support package, any investment would also have to be within certain financial parameters with Telstra’s equity investment being the minor portion of the overall transaction. I am pleased that we have been able to achieve both of those outcomes.” No doubt.

“Today’s announcement is a tremendous testament to our colleagues across Digicel Group and in particular, our 1,700 staff in the Pacific,” said Denis O’Brien, Digicel Founder and Chairman. “In 2006, we established a business in the South Pacific region that has helped democratise mobile communications and transform local economies and societies by making affordable best-in-class communications available to more than 10 million people across six of the most exciting markets in the South Pacific region.”

Jamaica-based Digicel will now focus on the Caribbean and Latin America, so the money it saves on tans-pacific flights alone should be significant. Following the deterioration of its relationship with China this move marks another significant statement from Australia that it doesn’t intend to let it have everything its own way in the Pacific region. This might be a good time for any other Aussie companies looking at M&A in the region to tap their government up for a contribution.