Far more than just the money, Digicel is a very big deal

By underwriting Telstra’s purchase of Digicel Pacific, the region’s largest telco, the Australian government is making the largest single foreign policy investment in decades, perhaps ever. The $US1.33bn deal eclipses Australia’s annual aid program to the Pacific and rivals Defence’s flagship 30-year Pacific Maritime Security Program – all in one transaction.

The deal is an extraordinary departure from the way Australia “does business” in the Pacific.

Digicel’s arrival from the Caribbean into the Pacific between 2006 and 2008 revolutionised telecommunication services, cementing the telco as the dominant player in six of the largest economies of the Pacific. Digicel retains a 92 per cent share of the mobile phone market in regional giant Papua New Guinea alone.

Taking advantage of this near monopoly, the business has been wildly successful. Earnings before interest, tax, depreciation and amortisation last year came in at $US223m, equalling 54 per cent of revenue before costs.

Digicel’s Pacific success has been overshadowed by debt, with Digicel founder Denis O’Brien forced to hive off its Pacific business while restructuring to protect the rest of the company’s interests in the Caribbean and Central America. It didn’t take long before rumours – never publicly substantiated – began circulating that China Mobile might be buying those Pacific assets.

Digicel’s near-monopoly on telecoms is of clear strategic importance. Controlling the telco would enable the owner to spy on and directly shape the information ecosystem to suit their needs. As we move into an interconnected 5G world, telecoms networks will become the backbone for public utilities and financial services. Controlling telecoms gives any actor tremendous power as a spoiler in these interconnected systems. It is clearly not in Australia’s interests for Digicel to fall into China’s hands.

The government is also eager to reverse a worrying trend of Australian corporate retreat in the Pacific. Businesses and state-owned enterprises are at the forefront of China’s growing presence in the Pacific, while risk-averse Australian businesses see the region’s markets as too small and too complicated in the face of comfortable profits at home.

It’s a bold play, and one we should all hope succeeds. But it does come with considerable risk, to say nothing of the impact it will have on the state of the broader bilateral relationship between Australia and China. A lot of sweeteners were needed to get a blue-chipper like Telstra involved. By funding cheap debt and equity, and guaranteeing any regulatory, foreign exchange and sovereign risk – all while giving Telstra full ownership – the government presented the company with an offer too good to refuse.

The government is quick to emphasise its confidence in making money from this deal, and the Digicel numbers back that up. Still, it all depends on Telstra maintaining Digicel’s financial performance in a market well outside its comfort zone.

There are broader reputational risks for Australia. Digicel is routinely accused of engaging in predatory and monopolistic practices. Of course, Digicel should remain profitable, but Telstra must guard against perceptions of unfair pricing and use its market power judiciously.

As Australia already spends $1.4bn in aid a year to improve the welfare and wellbeing of Pacific peoples, it is essential the government secures guarantees from Telstra in this deal that costs and services will improve.

The company’s operations in the region are also far from perfect, and its infrastructure is in need of upgrading. If choosing between China Mobile, private equity investors or Telstra, we should hope that Digicel being owned by an ASX-listed company will make it easier for Digicel’s business practices to come under scrutiny and result in improved service delivery and a better deal for Pacific consumers.

Buying Digicel doesn’t buy Australia an indefinite strategic monopoly over Pacific telecommunications. China Mobile – if it ever was really interested in the first place – could still decide to enter the market, but the cost of doing so would be much higher. PNG’s state-owned provider is already heavily indebted to China, and is one to keep an eye on. Finally, Australia has now set a precedent with Australian business. Companies that are still hanging on in the Pacific, or those looking to re-engage, might now look to the government for measures like the remarkable support Telstra has received, although it is unlikely the government has many more multi-billion-dollar wildcards up its sleeve.

Was Digicel angling for a deal and did Australia get duped into bankrolling the purchase? Perhaps the “threat” of a Chinese purchase was exaggerated. Unfortunately, we can’t call up Beijing to ask directly – and the CCP wouldn’t take our call if we tried. But if Telstra runs the business well and improves connectivity in the Pacific, the pay-offs for Australia and Pacific islanders could be real and long-lasting.