The Australian Government has persuaded Telstra to jointly acquire Digicel Pacific purportedly to keep it out of Chinese hands. We anticipate that this will help smooth the pathway for Telstra to gain the necessary future government approvals to monetise InfraCo assets.
The Australian Government will pony up US$1.33 billion which is the majority of the funds required with TLS providing the equity element giving it ‘ownership’ and operational control.
There is a 3-year earnout payment of US$250 million based on performance.
TLS will receive a US$45 million pa preferential distribution for the first 6 years, which implies a 16.5% pa return on its investment.
Digicel Pacific’s business is mostly generated by 4G prepaid mobile business in PNG, with additional business across Fiji, Samoa, Tonga, Vanuatu and Nauru. It has approximately 2.5 million subscribers and reported US$431 million revenue in the financial year ending 31 March 2021. That delivered EBITDA of US$233 million which helped TLS to financially justify the acquisition. TLS’s Board said the transaction is in the best interests of shareholders and exceeds the company’s acquisition criteria.
Investment view
The acquisition is not hugely material to TLS and will be positive for earnings from year one of ownership.
It clearly does not directly fit the company’s strategy, but we believe the ulterior motive is to gain favour with the Australian government for when TLS is seeking approval to monetise its remaining InfraCo assets. The company release included the comment that: “Mr Penn said the partnership represented an important milestone in the company’s relationship with the Australian Government.”
There is a risk for TLS that a change of government in Australia may view things differently, so there is no guarantee of smooth passage for relevant approvals.
TLS has already sold 49% of InfraCo Towers for an excellent multiple of 28x, so the next step will be to move on InfraCo Passive (70% of which is the NBN receipts) which at 17x FY22f EBITDA could be worth more than $25 billion in total. In a market seeking such long term infrastructure assets, TLS could realistically achieve a higher multiple.
The $1.35 billion share buyback from the Towers proceeds will now commence providing further share price support.
The company’s T25 strategy is based around growing the mobile earnings and is targeting mid-single digit underlying EBITDA growth and high teens EPS growth each year to FY25f.
The share price has strongly performed this year but still looks cheap on all valuation metrics, in our view. We maintain our Buy recommendation.
