Deals - Asia

Telstra to buy Digicel Pacific in Australia government-backed $1.6 billion deal

(Removes erroneous reference to Tahiti in 14th paragraph)

SYDNEY (Reuters) - Telstra Corp Ltd said on Monday it agreed to buy the Pacific operations of telecom firm Digicel Group in a $1.6 billion deal largely funded by the Australian government and seen as a way to block China’s rising influence in the region.

The government will front $1.33 billion of the total value, with Telstra contributing the rest, the Australian telco and a government statement said.

With China building its influence in the region, and months of market and media speculation surrounding Digicel’s future, Telstra said the Australian government approached it to help it buy the business.

“Digicel Pacific is a commercially attractive asset and critical to telecommunications in the region,” Telstra Chief Executive Officer Andrew Penn said in a statement.

“The Australian government is strongly committed to supporting quality private sector investment infrastructure in the Pacific region.”

The transaction includes a $250 million earn-out clause, subject to the performance of the business unit over three years, that could increase the overall value of the deal, Digicel said in a statement.

A sale of Digicel to a Chinese company would have been a cause of concern for the Australian government, amid rising strategic competition between Washington allies and Beijing in the Pacific region.

Digicel last year denied an Australian newspaper report it was considering a sale of its Pacific business to state-owned China Mobile Ltd.

Australian telecoms analyst Paul Budde described the deal as a “political buy”.

“If the government had not asked and underwritten it, Telstra would not have done it,” Budde told Reuters.

“Will Telstra be able to take over and run that business in an efficient way that makes money? It’s definitely possible but it will be a challenge.”

A joint statement by several Australian government ministers said on Monday that the acquisition reflected the government’s support of secure and reliable infrastructure in the region.

Telstra will fully own and operate Digicel’s Pacific operations, Australia’s biggest telco said.

Digicel, a Caribbean telco founded by Irish billionaire Denis O’Brien, is the largest mobile phone carrier in the Pacific, with operations in Papua New Guinea, Fiji, Samoa and Vanuatu - the most lucrative being those in Papua New Guinea (PNG).

Formerly administered by Canberra, PNG has turned increasingly to China for financing. It is one of the largest economies in the South Pacific, underpinned by energy and mineral resources.

The country’s rugged geography has created a natural barrier for telcos to compete with Digicel’s existing infrastructure, with many of PNG’s roughly nine million people spread out over remote villages and highlands.

Penn told analysts on Monday that Telstra was comfortable with having assets in diverse political environments.

He said the telco had met the PNG leadership team which would remain in place and he said the PNG government had indicated that it supported Telstra’s involvement.

The transaction, subject to various government and regulatory approvals, is expected to take up to six months to complete, according to Telstra and Digicel.

Telstra, a former government-owned telco, has been trying to restructure its operations as it faces persistent headwinds on its fixed-line business.

Telstra shares were up just over 2% in morning trading, helping push the broader market up 0.4%. (This story removes erroneous reference to Tahiti in 14th paragraph)

Reporting by Byron Kaye and Jonathan Barrett; Additional reporting by Nikhil Kurian Nainan; Editing by Peter Cooney and Stephen Coates