Australia’s Telstra in talks for Pacific arm of Denis O’Brien’s Digicel

Telstra has teamed up with the Australian government to consider a bid for the Pacific operations of Digicel Group, the debt-laden mobile phone provider controlled by Irish billionaire Denis O’Brien.

Australia’s largest telecoms company said on Monday it held talks with Digicel regarding a “potential transaction”, a move analysts said was motivated by Canberra’s desire to block a Chinese bid for the latter’s Pacific operations.

“The discussions are incomplete and there is no certainty that a transaction will proceed,” said Telstra, adding that it was responding to a story in the Sydney Morning Herald newspaper suggesting the telecoms company was preparing a A$2bn ($740m) bid.

Telstra said it was initially approached by Canberra to provide technical advice in relation to Digicel Pacific, which operates in Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu.

If it proceeded with a transaction, the company said it would be with financial and strategic risk management support from the Australian government.

Canberra did not immediately respond to a request for comment.

Brian Han, an analyst at Morningstar, said an acquisition of Digicel Pacific would have limited financial implications for Telstra but could have broader strategic consequences for a company pursuing a “simplification” strategy.

“At a broader level [this is] an important test case for Telstra to balance the need to be a ‘friend’ to government and the dangers of being an ‘underwriter’ whenever national communications security threats arise,” said Han.

Canberra is pushing back against the expansion of Chinese infrastructure companies in the Pacific, a region within Australia’s sphere of influence.

The Chinese embassy did not immediately respond to a request for comment.

In 2018, the government allocated A$137m to co-fund construction of a 4,000km telecoms cable to the Solomon Islands to prevent Chinese carrier Huawei from delivering the contract.

Australian media reports have linked China Mobile with a possible bid for Digicel, although there has been no public confirmation.

“There is a foreign policy interest in making sure those operations stay with non-Chinese characteristics,” said Ian Martin, an analyst at New Street Research, an independent research firm.

“The risk for Telstra is that it is a pretty complicated management exercise dealing with five or six different governments [across the Pacific],” he said.

Telstra said Digicel Pacific generated earnings before interest, tax, depreciation and amortisation of US$235m in the 12 months to December.

Digicel Pacific is a subsidiary of Digicel Group Holdings, which was founded in 2001 by O’Brien. The group is active in 32 markets in the Caribbean, Central America and Asia Pacific and is facing pressure to reduce its $5.4bn gross debt.

Last year, the company was forced to restructure its debt amid operational challenges linked to a decline in mobile voice revenues and a depreciation of the currencies in which it operated, according to a report by Fitch Ratings.

Fitch forecast Digicel’s revenues would increase from $2.2bn in 2021 to $2.4bn in 2024.