Hand of government in potential Telstra deal to buy Digicel Pacific for $2bn

Telstra’s potential deal to buy Digicel Pacific for up to $2bn – with most of that federal government money – makes little sense unless strategic imperatives are factored in.

Digicel Pacific has a dominant market position in the Papua New Guinea telco market.

The Australian government is backing Telstra to buy telco provider Digicel Pacific in a bid to block Chinese interests picking up the key strategic asset, whose affiliates have previously been linked to spying allegations from the former US ambassador to Jamaica, sources say.

The deal, valued at a rumoured $2bn with the lion’s share coming from the federal government, would block any potential Chinese bid to buy the provider, and was described by one source as Telstra being asked to do its “patriotic duty’’.

“It’s the government’s hand and Telstra is the glove here,’’ The Australian was told on Monday.

Telstra has confirmed talks are afoot to buy Digicel Pacific from Irish billionaire Denis O’Brien, one of the world’s richest people, with a “significant” funding contribution from the federal government part of the possible deal.

Government sources confirmed the government-backed bid, which could cost taxpayers $1.5bn, was a strategic move to prevent China from gaining a stranglehold on the Pacific’s dominant telecommunications system.

“If Telstra are not going to pay more than half of the purchase price, it’s clearly not commercially attractive to them. But we all know what the alternative is,” one said.

Digicel Pacific operates across Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu, and according to a US Securities and Exchange Commission filing last year, at that time commanded as much as a 91 per cent share of PNG’s mobile phone market.

The SEC filing indicates that the PNG operations were among the most profitable of the Digicel group, which filed for bankruptcy in May last year with debts of $US7.4bn.

Sources have told The Australian that Digicel Pacific uses Chinese company Huawei’s technology in its mobile networks, and there were fears that Chinese ownership of the company would give it an enhanced ability to intercept communications across the Pacific nations.

Former US ambassador to Jamaica, Donald Tapia, says in a video filmed by the Jamaica Gleaner news outlet in January that the Digicel network in that country was being used to listen in on his calls.

“I said to the CEO (of Digicel) the Chinese are listening to my mobile phone conversations that I have in Jamaica,’’ he says.

“Her answer was, we know … I thought she would deny it.”

Digicel told the Jamaica Gleaner at the time that a conversation about that topic did not occur and said no Chinese equipment was used in their networks.

The federal government in 2018 blacklisted Huawei from any involvement in the rollout of Australia’s 5G network in response to security advice, with the move one of the key triggers in Australia’s ongoing trade war with China, which has involved the imposition of crushing tariffs on the nation’s wine sector.

In a short statement to the ASX, Telstra said Digicel Pacific was performing well.

“Digicel Pacific enjoys a strong market position in the South Pacific region generating EBITDA of $US235 million in calendar 2020 with a strong margin, as well as extensive network coverage,’’ Telstra said.

But the company also said the initial contact with Digicel came about at the behest of the government, and any deal would be contingent on several pillars of federal support.

“Telstra was initially approached by the Australian government to provide technical advice in relation to Digicel Pacific which is a commercially attractive asset and critical to telecommunications in the region,’’ the company said.

“If Telstra were to proceed with a transaction it would be with financial and strategic risk management support from the Government.

“In addition to a significant 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.”

The Chinese government has been increasingly active across the South Pacific, striking a number of deals with governments to build terrestrial broadband networks, as well as a data centre in PNG, The Australian was told on Monday.

“All of which has been increasingly concerning for the Australian government,’’ the source said.

Telstra CEO Andy Penn. Picture: Alan Barber

China already owns the PNG government’s integrated information system – the hard fibre between key central agencies including the Treasury – and its domestic fibre-optic cable network.

The SEC filing says Digicel, which was issued a cellular license in PNG in March 2007, in September 2019 had 2.1 million subscribers in that country, with 945 mobile sites covering about 85 per cent of the population.

A PNG source familiar with the matter said if Digicel fell into China’s hands, it could “close the loop” in being able to monitor the country’s entire domestic communications network.

“Australia was terrified about them getting access to the node on the Coral Sea Cable.

“They want to be able to get some internet out of here clean without China tapping the whole communication network.”

The tussle for control of Digicel between Australia and China was described as a “dream come true” for Mr O’Brien, who now has the ability to drive the price of any sale higher.

“Telstra’s commercial interest in this area would be pretty much zero I would think,’’ a source said.

“It would certainly appear that the government is bankrolling it.’’

The reported $2bn price tag for the deal would be at the high end based on the numbers in last year’s SEC filing, which estimated the liquidation returns from sale of the Digicel Pacific assets at $US615.2m in a best-case scenario and $US493.9m at the low end.

The reported $2bn sum being offered for Digicel was way in excess of what it was worth, a source said, given the huge costs involved in maintaining its network.

“You don’t own the land here. You rent it from the landowners. The whole network relies on keeping those towers up and running.

“It’s a full-time job. Landowners steal the solar panels, they run the security at each site. Yes they’ve got great coverage, but it is so much hard work.”

Ord Minnett analysts said the deal would add about 5 per cent to Telstra profits in 2021-22 if a $1.5bn government support package was factored in.

Mr O’Brien was listed by Forbes last year as Ireland’s wealthiest Irish-born citizen, worth $US6.8bn.

He has held interests in large telecommunications and media outfits such as independent News and Media in Ireland, and in 2001 founded Digicel, which operates in 33 markets in the Caribbean, Central America and the Asia Pacific.

Digicel has been contacted for comment. Telstra declined to respond to questions around whether the deal was politically motivated.