A US$1.6 billion (K3.51 billion) deal has been struck for Australia’s largest telco to acquire Digicel Pacific, Papua New Guinea and the Pacific’s largest telecommunications business. Business Advantage PNG looks closer at this extraordinary deal, and examines want it means for Papua New Guinea.

Digicel PNG’s head office in Port Moresby. Credit: BAI

Following months of negotiations, Digicel Group Holdings Limited has agreed to sell its Digicel Pacific subsidiary – which operates in PNG, Fiji, Vanuatu, Samoa, Nauru and Tonga – to the Australian telecommunications company Telstra Corporation Limited.

The transaction is subject to government and regulatory approvals and is expected to be concluded within three-to-six months.

While Telstra will own and operate the business, acquiring 100 per cent of the ‘ordinary equity’ in Digicel Pacific, it is only contributing US$270 million (K947 million) of equity towards the US$1.6 billion purchase price (which may rise to as much as US$1.85 billion, if an agreed three-year US$250 million ‘earn-out’ is achieved).

In a move without precedent, Telstra said the remaining US$1.33 billion (K4.66 billion) capital would come from the Australian Government-owned Export Finance Australia ‘through a combination of non-recourse debt facilities and equity like securities’.

Other support provided by the Australian Government includes for ‘cash repatriation from the regions, FX protections, and political risk insurance for six years’.

Why buy Digicel?

Telstra’s Andrew Penn

The deal values the Digicel Pacific business at between 5.81 and 6.9 per cent of its 2021 earnings before interest, taxes, depreciation, and amortisation (EBITDA).

In a statement, Telstra’s Chief Executive Officer Andrew Penn admitted his company was ‘initially approached by the Australian Government to provide technical advice in relation to Digicel Pacific’ and only subsequently ‘considered acquiring the business with financial and strategic risk management support from the Government’.

Australia’s Foreign Minister Marise Payne said the support for the purchase was ‘consistent with Australia’s longstanding commitment to growing quality investment in regional infrastructure’ and ‘also reflects the Government’s commitment, as part of its Pacific Step-Up, to support the development of secure and reliable infrastructure in the region.

However, Paul Barker of PNG’s industry-funded think-tank the Institute of National Affairs (INA) told Business Advantage PNG that it was clear that Australian support for the purchase was also ‘driven partly by geopolitical concerns’: specifically, the need to ensure Digicel Pacific was not sold to Chinese interests.

While Penn said ‘the financial arrangements make it very attractive for Telstra’, he also reassured Telstra’s shareholders that Digicel Pacific was also a worthwhile acquisition on business grounds, describing the deal as ‘a unique commercial opportunity’.

‘Digicel enjoys a strong market position in the South Pacific region holding a strong number one position in all markets other than Fiji where it is the number two. The combined business generated EBITDA of US$233 million (K817 million) for the financial year ended 31 March 2021, with a strong margin,’ he said. (By way of comparison, Telstra’s 2021 EBITDA was AUD$7.6 billion (K19.95 billion) – roughly the size of PNG’s 2021 National Budget.)

Why sell Digicel?

If regulatory approvals proceed, the sale will mark the end of Digicel Group’s participation in the Pacific’s telecommunications market, which it has dominated since launching its Pacific expansion in 2006.

If Digicel Pacific is so profitable, why is Digicel Group selling?

In May 2020, the Digicel Group, which also owns telcos in the Caribbean and Latin America, filed for bankruptcy, with ‘unsustainable’ debts of US$7.4 billion (K26 billion). It subsequently restructured its debt with the approval of its creditors and was able to continue trading, but this dramatic event appears to have been the trigger for considering a sale of its most profitable business, now concluded successfully.

‘From a Digicel perspective, today marks a very successful realisation of a strategic investment following our entry in the South Pacific in 2006,’ said Digicel Group’s owner and founder, Denis O’Brien.

What are Telstra’s plans for Digicel Pacific?