Taxpayers will provide $1.9 billion to Telstra to help it buy South Pacific telco Digicel

Taxpayers will provide $1.9 billion to Telstra to help it buy South Pacific telco Digicel
  • Taxpayers will provide $1.9 billion to Telstra to help it buy South Pacific telco operator Digicel.
  • Telstra chief executive Andy Penn said Digicel was a commercially attractive asset.
  • It comes amid growing concern from national security experts about China-backed firms funding and buying strategically sensitive assets in the Pacific.
  • Visit Business Insider Australia’s homepage for more stories.

Taxpayers will provide $1.9 billion to Telstra to help it buy South Pacific telco operator Digicel from Irish billionaire Denis O’Brien, under an agreement sealed between the companies that will ensure it is kept out of Chinese hands.

Telstra will own 100 per cent of the new entity as part of the $US1.6 billion ($2.1 billion) deal, which is expected to be completed within six months. The sale follows almost a year of discussions between the telco giant and the federal government about the asset, which was subject to interest from Chinese telco operators.

Telstra chief executive Andy Penn said Digicel was a commercially attractive asset.

“We previously said that if Telstra were to proceed with a transaction it would be with financial and strategic risk management support from the Government,” Mr Penn said. “We also said that in addition to a government funding and support package, any investment would also have to be within certain financial parameters with Telstra’s equity investment being the minor portion of the overall transaction. I am pleased that we have been able to achieve both of those outcomes.”

Telstra will contribute $US270 million of equity to the $US1.6 billion purchase price and the Australian Government, through Export Finance Australia, is providing the remaining $US1.33 billion through a combination of debt facilities and equity finance. A further $US250 million will be paid subject to business performance over the next three years.

In a joint statement, Foreign Minister Marise Payne, Trade Minister Dan Tehan and Pacific Minister Zed Seselja said Digicel Pacific has been a successful and growing telecommunications provider in the Pacific for the past 15 years.

“Telstra’s acquisition sends an important signal about the company’s potential and about wider business confidence in the future of the Pacific region,” they said. “Digicel Pacific has been a successful and growing telecommunications provider in the Pacific for the past 15 years. Telstra’s acquisition sends an important signal about the company’s potential and about wider business confidence in the future of the Pacific region.

“EFA is providing financing that enables Telstra to take this commercial opportunity and will bring valuable experience in managing financial and other risks.”

Liberal senator James Paterson, chair of the federal parliament’s security and intelligence committee, said it was a “very exciting development for the Pacific and for Australia” and it would come with “no strings attached”.

“Digital communications are the key to development and prosperity, particularly in the developing world,” he said.“It’s a tribute to Australia’s commitment to the Pacific. It’s consistent with our long-standing policy of the Pacific Step Up, and it demonstrates that once again, Australia is a partner of choice whether that comes to aid and development, or more recently, the vaccine roll out and now the development of critical infrastructure.

“One of the key things about this agreement is that it demonstrates that Australia does so for the benefit of our friends and family in the Pacific, and unlike some other operators in the Pacific, we do so without any strings attached.

Asked whether the deal was about countering China, Senator Paterson said “this isn’t about any one other country”.

There has been growing concern from national security experts about China-backed firms funding and buying strategically sensitive assets in the Pacific, including a proposed Chinese fishing facility in Papua New Guinea and Digicel’s assets.

While Australia has long been the dominant provider of foreign aid in the region, Beijing has led the way in providing cheap loans to bankroll infrastructure projects. China was responsible for 37 per cent of all donor loans to the Pacific between 2011 and 2017, funding projects with a total value of about $US1.7 billion.

Telstra was approached by the federal government late last year about the prospect of an acquisition, amid reports there was interest from Chinese buyers. The Sydney Morning Herald and The Age revealed an initial offer was made in July, whereby Telstra would contribute between $200 and $300 million for the assets.

Telstra’s existing international division holds a large subsea cable network that has licences in Asia, Europe and the US. The value in this division comes from the facilitation of data traffic for the company’s major clients including Google, Facebook and Microsoft.

Digicel operates in six markets in the South Pacific including Papua New Guinea, Fiji, Samoa, Vanuatu, Tonga and Nauru. In the year ending March 31, it reported $US450 million in revenue and adjusted earnings [before interest, tax, depreciation and amortisation] of approximately US$ 222 million. Digicel will have no operational responsibility as part of the deal, but the brand will remain in the six markets.

Mr O’Brien will join the board of directors for the newly formed company, which was a request made by Telstra earlier this year.

“I am very pleased that today’s agreement with Telstra, our very near neighbour in the Pacific, will further enhance DPL’s infrastructure, data and call termination links with one of the largest and most reliable networks in Australia,” Mr O’Brien said. “I thank all of our colleagues in the South Pacific and beyond who have made today possible, and I remain committed to ensuring a successful transition in my ongoing role as a director of the newly formed holding company for DPL.”

Barrenjoey advised Telstra on the deal while Macquarie advised the government. Former Treasurer Joe Hockey’s firm Bondi Partners was engaged by Digicel to help sell its Pacific assets.

Telstra shares closed at $3.73 on Friday.

This story originally appeared in the Sydney Morning Herald. Read the original story here.