Australia’s largest telco has agreed to buy Digicel Pacific. Business Advantage PNG considers what we know about its plans for the company.

Credit: Digicel via Facebook

In 1973, as Papua New Guinea achieved self-government ahead of its full independence two years later, Australia’s Overseas Telecommunications Commission (OTC) handed over its PNG-based telecommunications assets and left the country.

Forty-eight years later, the OTC’s direct successor is planning to return to PNG and the Pacific through its purchase of Digicel Pacific.

While Telstra has many business interests outside of Australia (in undersea cables, for example), the acquisition of Digicel Pacific will represent by far its most significant investment in the Pacific.

Telstra’s Andrew Penn

So, what does it plan to do?

Its Chief Executive Officer Andrew Penn has confirmed it intends to run the business as a stand-alone venture within its new Telstra International subsidiary. It will be overseen by a Telstra-controlled board, which will also include Digicel Group’s current owner Denis O’Brien and two independent directors.

In news that should reassure Digicel Pacific’s 1700 employees, Digicel has confirmed that its ‘current DPL management team will remain with and continue to lead the business’.

‘We don’t propose to change that,’ Penn told analysts this week.  ‘And we don’t propose to … allocate a large number of senior executives from Telstra into the business. It’s already very well run.’

The Digicel brand will also remain.

Challenging

The Institute of National Affairs’ Paul Barker

Initially, with Telstra itself having limited knowledge the Pacific’s telecommunications markets, it will be relying on existing Digicel staff and Denis O’Brien himself for guidance on how to run the business.

‘The acquisition will be a challenging one,’ the PNG Institute of National Affairs Executive Director Barker tells Business Advantage PNG. ‘They’ll need to ensure they have hands on the ground and all the local staff on deck to steer the ship.’

With Digicel Pacific’s ageing network infrastructure also needing to be upgraded, its 2.5 million subscribers and nearly 2000 business customers across the region will also be looking for assurances about Telstra’s appetite to invest in that network.

That appetite appears to be there, with a Telstra spokesperson confirming to Business Advantage PNG that the business case for acquiring Digicel contained a provision for a 15 per cent ratio of capital expenditure to sales, ‘in line with benchmarks across the region’.

Growth opportunities

Where does Telstra see the growth opportunities in the Pacific? Oliver Camplin-Warner, Chief Executive Officer of Telstra International, gave some insights this week in a shareholder question-and-answer session.

‘When I look at the growth opportunities moving forward, one of the key ones … is around mobile penetration. When we look at mobile penetration in PNG today, it sits around the 30% mark. So, we see a significant opportunity to leverage the extensive network footprint that they [Digicel] have rolled out,’ he said. He said the ongoing rollout of 4G services would be a focus.

Telstra will also look to develop synergies between Digicel and its other international businesses.

Regulatory hurdles

While the terms for the deal have been agreed between the participants, regulatory and government approvals across all six Pacific markets are by no means guaranteed.

In PNG, Telstra will need to satisfy regulator, the National Information and Communications Technology Authority (NICTA), and possibly consumer watchdog, the Independent Consumer and Competition Commission, as well as keep the PNG Government onside.

It is not clear if any government-to-government discussions have taken place to smooth the approvals process, although Telstra’s CEO told the media this week that he had ‘spoken to each of the Prime Ministers in each of these markets and they’re very well disposed to Telstra’s involvement.’

Regulators are likely to examine the implications for competition and the national interest but are not bound to do a government’s bidding.

‘In PNG, we’ve had the recent unsuccessful Kina Bank–Westpac buyout, which the ICCC rejected, and the pending buyout of Oil Search by Santos, which PNG’s Prime Minister James Marape said needs to be in the country’s strategic interest, as recent examples,’ says Paul Barker.

Competition

Barker suggested that the acquisition could lead to ‘a bit more more competition over time’ in PNG’s lucrative urban centres, which will also be the primary target market of Vodafone Fiji when it launches its PNG service next year.

The acquisition by Telstra will also have implications for PNG’s state-owned telecommunications companies, Telikom PNG and bmobile.

Last week, Prime Minister James Marape rescinded the appointment of the Managing Director of Kumul Consolidated Holdings, Isikeli Taureka, partly due to what he described as delays to the merger and partial privatisation of the two state telcos.

Digicel is already by far the dominant telco in PNG, with a 92 per cent market share. Now, PNG’s state-owned telcos potentially have an even more powerful competitor to deal with, although there may be greater opportunity for the shared use of telecommunications infrastructure – something Digicel has until now resisted.

‘The cooperation between Telstra and the Australian Government should provide opportunities for the increased use of state-owned wholesale assets to meet service requirements for the betterment of telecommunications across the country,’ stated Prime Minister James Marape this week. ‘There is an expectation that wherever possible infrastructure sharing will be encouraged, reducing the need to erect several towers at the same location. Telikom will welcome the opportunity to co-locate on Digicel infrastructure.’

Finally, there’s the issue of the timeframe of Telstra’s investment. Digicel’s licence to operate in PNG was recently renewed for a further 15 years. The financing deal Telstra has struck with the Australian government means Telstra cannot exit Digicel Pacific for at least six years. However, Andrew Penn said this week that Telstra wasn’t ‘entering this with a view to exit.’

‘The point of the six years is that we wanted to make sure we effectively had a clear line of sight of pay-back of our equity of $US270 million … You should not take that as a signal, as an intention, to exit at that point.’