20 July 2021
Australia buying Digicel hits two birds with one stone
On top of staving off a China telco monopoly, underwriting the purchase would show the government is putting big money on the table to get ‘blue chip’ companies to invest in the Pacific. Originally published in the Australian Financial Review.
To the extent that most Australians have had any interaction with Digicel might be to have seen the network’s name pop up on their phone screen when they arrived for a pre-pandemic holiday in a Pacific Island destination such as Vanuatu or Fiji.
But in many of the nations of the Pacific, Digicel has been dominant – the catalyst of a telecommunications revolution. The developing world telco built its reputation in the Caribbean and Central America before it arrived in the Pacific in the mid-2000s with cheap and reliable prepaid mobile services.
Bold, brash and boisterous, the “bigger, better” network staked out new turf on remote islands and up into PNG’s rugged highlands, quickly becoming a dominant player in six Pacific economies. Along the way it also became an internet provider, a pay-TV operator and even has a free-to-air TV channel in PNG with its own nightly news program as well as the rights to the all-important NRL.
But debt shadowed Digicel’s rise. By 2019, with the leverage weighing down his company, founder and Irish national Denis O’Brien went back to his lenders with an offer of a restructure in exchange for them taking a haircut. Digicel’s Pacific assets were hived off into a separate subsidiary – the sort of subsidiary that might be ripe for a sell-off.
Not long after, rumours started to circulate that China Mobile might be interested in buying those Pacific assets. Cue the concern in Canberra that the telecommunications backbone of the region might fall under Beijing’s control. Never one to discourage a deal, Digicel’s founder appointed bankers to advise on any potential approaches.
Now, after many months, it seems a deal is in the offing: Australia’s government is reported to be underwriting three quarters of a $2 billion offer for Digicel Pacific. Telstra would be part of the deal, but in a statement to the ASX the country’s biggest telco was at pains to point out that the original approach to invest had come from the government.
It says the discussions are “incomplete” and that there is “no certainty” that a deal would proceed.
And while Telstra says Digicel Pacific is a commercially attractive asset, the deal probably doesn’t make compelling commercial sense for the company. The formerly state-owned entity has spent the past few years making itself less complicated, and preparing for a future where the government offloads its own internet company, NBNCo. Perhaps helping out with Digicel in the national interest won’t hurt its reputation when the domestic considerations are back on the agenda.
Hardheads in Australia’s security establishment have been worried about Digicel for some time. Those concerns range from the direct security implications of an unfriendly actor getting near-monopoly control of critical infrastructure, through to the prospect of Digicel’s remarkable cashflow being able to fund a political patronage machine that could undermine governance and public policy for decades to come. Getting this deal together shows how serious the intelligence community is treating the rumours of China’s interests in Digicel, and would support the arguments of those who’ve pushed for Australia to get more hands-on with infrastructure in the region.
The Australian government is also eager to reverse a worrying trend in the Pacific. While Chinese businesses and state-owned enterprises are at the forefront of China’s growing presence in the Pacific, Australian businesses are in retreat. From commercial banks to infrastructure, Australian businesses engaged in the process of derisking see the Pacific markets as too small and too complicated in the face of comfortable profits at home.
The underwriting of the purchase of Digicel can hit two birds with one stone. It can stave off a China monopoly, while showing the Australian government’s willingness to put significant money on the table in new and creative ways to get ‘blue chip’ Australian businesses back into the region.
Buying in will have its risks. Digicel is producing good financial returns now – Telstra notes earnings of US$235 million ($358 million) in 2020 – but will need continued capital investment to keep its network, all of which now relies on Huawei technology, fit for purpose. Infrastructure in the region’s harsh environments is notoriously expensive to maintain, and comes with a multitude of operational, governance and stakeholder issues among them. And there’s the diplomatic dimension – Australia would quickly become the central player in the critical infrastructure of countries including Fiji and PNG.
The government has ultimately decided that these risks are manageable when weighed against making a China monopoly in the Pacific telco space much harder, and getting big Australian business back into the game.
For the taxpayer, and the $1.5 billion the government is planning to put on the line, let’s hope they’re right.