Telstra buys Digicel’s Pacific operations in government-backed deal

The Australian government has backed telecoms group Telstra’s $1.6bn acquisition of the Pacific businesses of Digicel Group in a move analysts said was designed to head off Chinese influence in the region.

Telstra said it was initially approached by Canberra to provide technical advice in relation to Digicel Pacific, part of the group founded by Irish billionaire Denis O’Brien that operates in Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu.

The government will contribute $1.3bn to finance the deal through a combination of loans and securities, with Telstra paying the rest, the company said in a filing to the Australian Stock Exchange.

Analysts said the financial benefits of the deal would be minimal for Australia’s largest telecoms group but the acquisition was in line with the government’s desire to limit Chinese leverage over the South Pacific islands.

Canberra has been embroiled in a bitter dispute with Beijing after Scott Morrison, the Australian prime minister, called for an investigation into the origins of the coronavirus pandemic. China has imposed tariffs and barriers on a range of Australian products, including barley, coal and beef in retaliation. Morrison signed a military agreement with the US and UK last month to counter China’s assertiveness in the region.

“Let’s be honest, I don’t think this is a deal that Telstra would have done on its own,” said Brian Han, an analyst at Morningstar.

Han said the financial benefits for Telstra would be “marginal” but the offer of financial assistance from the Australian government minimised the risks.

“So then when you consider that you might think that its better to be friends with the government than reject the friendship.”

The government’s motivation was to prevent Chinese companies from buying Digicel, which would “essentially buy themselves a monopoly over the telecommunications service provision in the Pacific”, said Jonathan Pryke, director of the Pacific Islands Program at the Lowy Institute, a Sydney-based think-tank.

“For the federal government this is not a business deal, this is a geostrategic one,” he said.

Australian companies had largely abandoned the region because of the difficult business conditions, but it has become strategically important in the face of the heightened tensions with Beijing.

Digicel denied Australian media reports last year that it was considering selling the business to China Mobile, according to Reuters.

O’Brien said the sale marked a “very successful realisation” of his group’s investment in the region. Digicel added that the deal included a $250m earn-out clause in addition to the $1.6bn reported by Telstra.

“Digicel Pacific is a commercially attractive asset and critical to telecommunications in the region. The Australian government is strongly committed to supporting quality private sector investment infrastructure in the Pacific region,” said Andrew Penn, Telstra chief executive.

Dan Tehan, Australia’s trade and investment minister, said the deal was “consistent with Australia’s longstanding commitment to growing quality investment in regional infrastructure”.

Digicel Pacific generated $431m in revenues in the 12 months to March 31, and earnings before interest, tax, depreciation and amortisation of $233m from a total of 2.5m subscribers.

Most of its sales came from Papua New Guinea, Telstra said.

Telstra shares were up as much 2.9 per cent on Monday.