Telstra announced Wednesday that it had completed the acquisition of Digicel Pacific Limited, for US$1.6 billion (A$2.4 billion), backed by the Australian Government. Telstra contributed just US$270 million of equity to the deal, with the Australian Government shelling out the remaining US$1.33 billion through cheap non-resource loans and “equity-like securities”. Despite its comparatively slim contribution to the buyout, Telstra owns 100% of Digicel Pacific.

The transaction and its value

Digicel Pacific is the biggest mobile operator in the South Pacific region, provides communication services in six markets including Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu.

Digicel Pacific is a wholly owned subsidiary of Digicel Group Holdings Limited, based in Jamaica.

In October, 2021, Digicel Group Holdings Limited announced to sell Digicel Pacific Limited to a subsidiary of Telstra Corporation Limited, with fund from the Australian Government through Export Finance Australia.

The transaction values Digicel Pacific at up to US$1.85 billion, inclusive of a three year, US$250 million earn-out, equating to approximately 8.3 times DPL's adjusted earnings before interest, tax, depreciation and amortisation of approximately US$222 million in the year ended March 31, 2021. A payment of US$1.6 billion, before deduction for customary working capital and other adjustments, is payable to DGHL upon closing of the transaction and Digicel expects to achieve the maximum earn out payment of US$ 50 million in respect of the first earn out period which is based on service revenue performance for the year ended March 31, 2022.

Australian Government's support 

The Autralian Govenment provided the majority of fund for Telstra to acquire Digicel Pacific.

The Autralian Government provided a financing package through Export Finance Australia (EFA) of USD1.33 billion to support Telstra’s acquisition, consistent with Australia’s long standing commitment to growing quality investment in regional infrastructure. This package includes debt and equity like securities designed to secure the Australian Government a long-term return on its financing.

Australian Foreign Minister Penny Wong said her government’s support for the deal “reflects our commitment to help build a stronger Pacific family through investment in high-quality infrastructure.”

Before the deal was announced, there was speculation in the market and media about Chinese companies interested in making a bid, which would have been a cause of concern for Australia amid rising competition between ally the United States and China in the Pacific.

Backed with the Autralian Government fund of USD1.33 billion, Telstra contributed just approximately US$270 million of equity to the deal. Despite its comparatively slim contribution to the buyout, Telstra owns 100% of the ordinary equity of Digicel Pacific.

In a statement, Australia’s Minister for Trade and Tourism, Don Farrel said: “The finalisation of Telstra’s acquisition marks a significant milestone in Australia’s economic engagement with our Pacific family.

“This transaction sends a positive signal of business confidence in the Pacific region, and we hope it will encourage further investment in the region from top tier Australian companies.”

PNG tax dispute

The deal was threatened due to a tax dispute between Papua New Guinea (PNG) and Digicel Group. 

The PNG Government introduced a "new arbitrary, company-specific tax" on March 25, 2022, which was "perplexing not just for Digicel, but also for the Papua New Guinea economy given the reputational and credit rating implications of this sudden, bizarre and unprecedented tax".

With the new tax, PNG would impose a tax of almost US$100 million (AU$130 million) on the planned US$1.6 billion (AU$2.1 billion) sale of Digicel Pacific to Telstra.

Digicel in April said it was considering legal options after PNG imposed a tax of almost US$100 million that could affect the planned US$1.6 billion sale of its Pacific operations to Telstra.

Telstra said in a statement that Telstra is not part of this process and the outcomes of this process are a matter for Digicel.

Finally, Digicel and Papua New Guinea entered into a binding international arbitration process to resolve the disputed almost US$100 million exit tax and to waive a further US$14.2 million sought in respect of non-payment of the tax to date.

Operations in the future

With 1700 employees and around 2.5 million subscribers from retail customers through to large enterprises, Digicel Pacific is the number one telco in Papua New Guinea, Nauru, Samoa, Tonga and Vanuatu, and number two in Fiji.

According to Telstra, Digicel Pacific generated US$466 million in service revenue for the 12 months to the end of March 2022, had an EBITDA of US$233 million for the financial year ended 31 March 2021 with a relatively high EBITDA margin of 54 per cent.

Telstra CEO Andrew Penn said the Pacific telco would be operated by Telstra International as a stand-alone business, maintaining separate P&L and IT systems. Telstra will also retain the same Digicel brand that its customers across the Pacific region know and love, and the Digicel Pacific management team will continue the day-to-day running of the business.

At its recent T25 strategy launch, Telstra announced that the ambition for its International business is to deliver profitable growth and value by leveraging the growing strategic significance of its international network. The completion of the acquisition deal represents an important initiative in the delivery of this ambition.

Telstra International Chief Executive Officer, Oliver Camplin-Warner welcomed Digicel into the Telstra family and said it was a significant acquisition for Telstra and for Telstra international.

Telstra will continue to invest in and operate the business across its six South Pacific markets – Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu.