‘The discussions are incomplete and there is no certainty that a transaction will proceed,’ Telstra said in a statement on Monday.

If it were to proceed, however, Telstra said it would be with ‘financial and strategic risk management support’ from the Australian Government, ‘with Telstra’s equity investment being the minor portion of the overall transaction.’

Some estimates suggest a valuation for Digicel’s Pacific business of up to AUD$2 billion (K5.13 billion), with Telstra saying the business reportedly achieved profits (EBITDA) of US$235 million (K824 million) in 2020. Media reports suggest Telstra’s share of any buyout might be between AUD$200 million (K513 million) and AUD$300 million (K770 million), with Export Finance Australia (Australia’s export credit facility), providing low-cost finance for the rest – as much as AUD$1.5 billion (K3.85 billion).

Consequences

Should the Digicel and Oil Search deals go ahead, these two transactions would represent seismic shifts in Papua New Guinea’s energy and telecommunications sectors, introducing sizeable new entities capable of supporting major new investment.

They could also provide more opportunities for PNG-based investors.

‘It would be a concern to PNG’s capital markets to lose such a significant PNG company as Oil Search,’ David Lawrence, Chairman of PNG’s stock exchange, PNGX, tells Business Advantage PNG. ‘Given that Oil Search would own a significant percentage of the merged entity and has over 4000 PNG shareholders, we would hope that Santos becomes listed in PNG if the transaction occurs.’

‘The competitiveness of the market reflects a growing understanding among business leaders that creating value requires more than cost-cutting’

In the case of Digicel, geopolitical factors are the main motivation for a transaction that, according to one Australian Financial Review commentator, has ‘the potential to backfire badly’. Put simply, Australia and its allies don’t appear to want Digicel (which has been on the market at the right price since last year, due to the heavy indebted parent company) to fall into the hands of Chinese interests.

On the other hand, the Santos move would appear to be a genuine attempt to create greater value between two comparable companies, at a time when Oil Search’s share price is around half what it was in early 2020 and when there is an increased urgency about getting the next roster of gas projects under way.

M&A trend

Mergers and acquisitions (M&A) activity occurs all the time in business, but there is increasing evidence that the current global pandemic is creating more appetite for it, partly because some companies are doing better than others in the global pandemic, and partly because money is relatively cheap to borrow at the moment.

Globally, there is more capital available for mergers and acquisitions (M&A) than ever before, according to a recent report by PwC.

‘This abundance of capital is likely to shape the M&A landscape well into 2022—and may put … buyers on a collision course as they compete to acquire technology, capabilities, and other sources of advantage,’ says PwC. ‘The competitiveness of the market reflects a growing understanding among business leaders that creating value requires more than cost-cutting—and they are willing to pay more for revenue synergies that fuel long-term growth.’

In PNG, Air Niugini subsidiary Link PNG’s bid to acquire equity in ailing rival PNG Air is before the ICCC, while Paradise Foods’ bid to acquire Heinz Foods’ PNG subsidiary Hugo Canning has received ICCC approval, in spite of the move not proceeding. Anecdotally, some other PNG companies are looking to dispose of non-performing subsidiaries. There are even rumours of a private sector bid for one state-owned entity.

It will be interesting to monitor the progress of such M&A activity, both large and small.

Whether the big deals above occur or not, PNG’s business landscape is likely be very different before the current global economic downturn, with its attendant medical and geopolitical complexities, comes to an end.