Telstra Corp Ltd [ASX:TLS] is partnering with the Australian government to buy Digicel Pacific in a US$1.6 billion deal.
The deal is seen by many as an effort to curb China’s influence in the Pacific region.
The Australian Financial Review described the deal as the most extraordinary of the year:
‘[I]t is hard to think of a similar deal in the last generation, and probably much longer.’
Telstra Corp Ltd [ASX:TLS] share price is currently trading at $3.82 per share, up 2.41%.
Over the course of one year, TLS shares have gained almost 40%.
TLS acquires Digicel Pacific
Telstra and the Aussie government finalised a deal to buy and operate what is described as the largest telecommunications company in the Pacific.
The US$1.6 billion purchase is largely bankrolled by the government, who will provide $1.33 billion toward the acquisition through its Export Finance Australia branch.
Telstra is contributing $270 million of equity.
Despite the funding disparity, Digicel will be owned and operated by Telstra, with TLS owning 100% of the ordinary equity.
Telstra CEO Andrew Penn said Telstra was initially approached by the federal government for technical advice on Digicel. This then morphed into considerations of Telstra acquiring the strategic asset with the commonwealth’s help.
Why is Digicel Pacific strategically important?
As Penn explained:
‘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 for the financial year ended 31 March 2021, with a strong margin.
‘Digicel Pacific has already invested significant capital in PNG, which is its largest market, to achieve extensive network coverage including 4G to 55 per cent of the population. The medium to long-term capex to sales is expected to be around 15 per cent.’
The acquisition is also expected to deliver an attractive IRR, with Telstra saying the deal exceeds all Telstra M&A criteria.
The deal is EPS accretive and implies a multiple of 5.81-6.9 times FY21 EBITDA for the acquisition of Digicel Pacific.
Source: Telstra presentation
Digicel generated around 75% of its revenue from its mobile business, which is largely prepaid. The rest of Digicel’s revenue comes from business solutions, TV, and broadband services.
Digicel currently services 1,500 small-to-medium business firms, 250 large companies, and 200 corporates in PNG.
Source: Telstra presentation
Telstra’s deal highlights wider geopolitical game
Telstra’s acquisition has drawn plenty of attention today, not just from the financial industry.
Telstra snagging Digicel follows tensions between China and Australia, and increased geopolitical manoeuvring, evinced recently by Australia’s latest nuclear submarine alliance with the UK and the US.
The acquisition also comes after China’s biggest telecoms operator showed interest in purchasing Digicel.
Today’s developments highlight Australia’s souring relationship with China. This divorce from our vital trading partner has plenty of implications for our economy.
But what few are talking about is the rolling effects for our markets and our portfolios.
That’s why I think you should read the latest dispatch from our Editorial Director Greg Canavan. In ‘Divorcing the Tiger’, Greg outlines what the Australia–China ‘forever split’ can mean for your wealth.
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