Team Penn does Canberra’s geopolitical bidding

There are many ways to look at Telstra’s $US1.6 billion ($2.1 billion) acquisition of South Pacific-based communications group Digicel Pacific - the most generous of which is that it’s a geopolitical public service. A less favourable interpretation is that Telstra was a gun for hire - used by the federal government to keep a strategically important communications company away from China’s grasp.

Telstra makes no secret of the fact that buying the South Pacific-based telco from the wily Irish businessman, Denis O’Brien, wasn’t a deal it would have considered under normal circumstances.

Digicel is the dominant player in six Pacific economies including PNG and FijiCredit: Getty

Quite the opposite. Our largest communications company has spent years getting out of or avoiding Asian retail telco businesses in Asia. This was clearly a diversion from Telstra’s strategic script.

Telstra chief executive Andy Penn argues that the recently announced phase two of its strategic overhaul (called T25) would involve some international expansion. But a mobile phone business anchored in PNG?

However, acquiring Digicel was a deal too good to pass up. The terms of the transaction are such that the government carries the risk and the debt.

Telstra will pay $US270 million for 100 per cent ownership and will be entitled to receive $US45 million for six years - meaning the business will pay back Telstra its purchase price over that period.

From Telstra’s perspective it is buying $US233 million of yearly earnings before interest, tax, depreciation and amortisation in Digicel - a company with 54 per cent margins and a low capital expenditure profile.

There is an earn out provision that increases the price O’Brien receives if Digicel performs better than expected - and the government will pay for 80 per cent of that.

The government also supplies Telstra with political risk insurance.

Eureka!

Given the government is stumping up the vast majority of the money needed to pay for Digicel, it’s a clear transfer of value from taxpayers to Telstra shareholders.

Penn is pretty coy about how this extraordinary transaction came to pass. But he says the genesis was an approach from the government for technical advice around 10 months ago.

Having then become more familiar with the operations of Digicel, team Telstra was capable of seeing the upside, assessing the downside and understanding the size of the carrot the government was dangling.

Telstra’s has plenty of points in the favour-bank with the government - not a bad place to be in the closely regulated telecommunications industry. “We have very substantial relations with the government and they are important for us,” Penn said in an interview with this masthead.

Denis O’Brien has cleverly played the geopolitics.Credit: Getty

Penn has warned investors to read little into the six ‘no exit’ clauses built into the agreement. Indeed, if Digicel keeps delivering there would be little incentive for Telstra to sell.

What Penn isn’t so vocal about is what an exit would look like if the acquisition doesn’t pan out as Telstra is hoping.

He isn’t prepared to comment on whether there is a list of companies, or more particularly, countries that Telstra could not sell to.

But this is not on the near term horizon for Telstra. Indeed, with all the safeguards built into the deal and with some potential for growth if COVID lifts, it’s a positive and more earnings per share accretive deal for shareholders than a buyback.

If there is a negative to the Digicel deal, from a shareholder perspective, it’s that it doesn’t really move the dial for a company the size of Telstra.

In an otherwise flat day on the market Telstra’s share price rose a handy 2.8 per cent.

Of course Telstra isn’t the only winner from this deal. First prize goes to O’Brien - a financially motivated seller who played geopolitics perfectly.

If people can get their heads around the fact that this is really a government deal hidden behind a Telstra mask, then it’s a win-win-win.

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