Telstra in talks to acquire Digicel Pacific in bid to keep China at bay

Telstra has confirmed that it is working with the Australian government on a takeover bid for part of the Digicel group, a move that is being widely viewed as politically motivated.

The Australian incumbent issued a statement to the securities exchange following reports in the national press.

“In response to a story in The Age/Sydney Morning Herald (17 July 2021) Telstra has confirmed it has been in discussions regarding a potential transaction to acquire telecommunications company, Digicel Pacific in the South Pacific region in partnership with the Australian Government,” the telco said, adding: “The discussions are incomplete and there is no certainty that a transaction will proceed.”

By way of further clarification, Telstra said that it was approached by the government to provide technical advice pertaining to Digicel Pacific, which it described as “a commercially attractive asset and critical to telecommunications in the region.”

And that is probably the key sentence in its announcement. As the FT noted, the Australian government is concerned about expansion from Chinese companies in the Pacific region and is now starting to push back. It referenced a situation in 2018 when Canberra spent A$137 million to co-fund a cable rollout to the Solomon Islands in order to block Huawei from delivering the contract, as well as noting that a number of media reports have named China Mobile as a possible buyer for Digicel.

Now it seems the Australian government is once more willing to pay to put the block on China.

According to Telstra, if it is to proceed with any transaction it will be with financial and strategic risk management support from the government.

“In addition to a significant 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,” the telco added.

In other words, this is not really Telstra’s circus.

Nonetheless, the operator did its best to convince us that Digicel Pacific is a sound investment, talking up its strong market position, extensive network coverage, and solid earnings; the unit generated EBITDA of US$235 million last year, with a “strong margin,” Telstra said, without providing any further information on what that margin might be.

Digicel Pacific is part of the Digicel group of companies founded 20 years ago by Irish businessman Denis O’Brien. The Pacific unit came into being in 2006 and comprises telecoms businesses in  Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu.

According to the original report in the Sydney Morning Herald, the joint Telstra/government bid for Digicel Pacific comes in at A$2 billion, with Telstra shouldering A$200 million-A$300 million of the cost burden.

Telstra asked O’Brien to sit on the company’s board and requested that revenue forecasts be underwritten for three years, the paper said, citing unnamed sources. It added that O’Brien could be ready to walk away from the talks though, due to frustrations over Telstra’s conditions.

It’s anyone’s guess whether the discussions will come to fruition, but it is pretty clear that hiving off some assets could turn out to be a good move for Digicel, one way or another. The telco group has significant debt pressures and is currently struggling for roaming revenues due to the impact of the Covid-19 pandemic on the travel industry. If Telstra does not emerge as a buyer here, someone else might.