Australian Government mulls funding Digicel bid to block China in Pacific
The Australian federal government is considering offering financial support to local bidders circling the Pacific operations of a telecommunications business Digicel to block Chinese companies acquiring the politically sensitive assets.
Digicel, the largest mobile business in the western Pacific, owned by Irish billionaire Denis O'Brien, is being crawled over by buyers who see an opportunity to buy the key infrastructure, which is suffering from high debt levels and weak earnings because of the pandemic.
The Bermuda-based company is a dominant mobile phone network operator in 33 countries including Australia's closest geographical neighbour, Papua New Guinea, as well as Fiji, Tonga, Vanuatu and Samoa.
Several Chinese entities such as China Mobile, Huawei and ZTE are said to be considering buying the struggling telco's Asia Pacific division.
The Morrison government recently considered ways it might prevent China buying the assets, such as assisting buyout funds through subsidised loans or loan guarantees.
Foreign affairs and national security officials have also been exploring options, including joining with close security allies the United States and Japan.
While discussions are at a preliminary stage, if any deal is struck it would mark a major shift in how Australia protects its national interest in the region.
But some close observers warned that O'Brien – variously described as "a veteran of many scraps", "a street fighter" and "wily"– would see current tensions between Australia and China as an opportunity to maximise his exit price.
At least two private equity firms from Australia and the United States have been in discussions about potentially launching a bid, but government support based on national security grounds would be required to beat the Chinese, sources said.
A consortium led by former telco executives including Kumul Telikom chairman Andrew Johnson met with several private equity firms to discuss potentially partnering with the buy-out funds.
Investment bank Citi, which has advised Digicel in the past, is helping with some discussions, a source said, but hasn't been formally mandated as part of any sales process. Citi declined to comment.
Chinese entities were "making a big play" for Digicel's Pacific assets and were prepared to pay well above commercial prices for the firm, a source said.
"If it's true there was a [Chinese] state buyer for that business, there would be two different price points – commercial and strategic," said another source.
"It would be for the government to determine how best and whether to close that difference, said Denis O'Brien, who started Digicel.
Government loans would be cheaper than any other funding source.
The government has been reluctant to own non-core assets – which was one reason it gave for not rescuing Virgin – and would be unlikely to take an equity stake.
A government spokesman declined to comment.
Prime Minister Scott Morrison was poised to meet PNG Prime Minister James Marape last month, but the trip was cancelled due to political instability in PNG.
Digicel, which restructured its debt earlier this year, has about US$6.7 billion (AUD$8.8 billion) of debt and has suffered a big fall in revenue during the COVID-19 economic crisis that has hit hard the tourist-dependent economies of the Pacific. Mobile phone traffic has plunged.
The telco, which considered a public listing in 2014 valuing the company at US$2 billion, paid at least $US1.9 billion of dividends to O'Brien between 2007 and 2015, the Irish Times reported.
One complication deterring Australian government involvement is that Digicel is incorporated in the tax haven of Bermuda and owned by a billionaire.
China has been expanding its influence and footprint in the region in recent years, including loans and foreign aid to small Pacific countries, and buying up strategically important assets such as ports.
The Coalition government was already forced to spend almost $100 million (US$76 million) to fund two-thirds of a 4700-kilometre undersea cable from Australia to Papua New Guinea and the Solomon Islands, to stop Chinese telco Huawei gaining a foothold in the Pacific and potentially spying on the region.
Huawei was banned by the Turnbull government from participating in Australia's 5G network because of national security concerns.
Australia is also partnering with Japan and the United States to finance about US$30 million for an undersea fibre optic cable to the Republic of Palau, an archipelago of over 500 islands in the Micronesia region in the western Pacific Ocean.
The Morrison government has a $2 billion (US$1.5 million) Australian Infrastructure Financing Facility related to its "Pacific Step-up" plan, to boost support for infrastructure development in Pacific countries – partly aimed at countering China's creeping influence in the region.
The federal government's export credit agency, Export Finance Australia, can provide loans and guarantees to Australian businesses for overseas infrastructure projects, including telecommunications energy, electrification, water and sanitation, and transportation.
The agency had its mandate expanded in 2019 to "finance infrastructure projects in the Pacific and broader Indo-Pacific region that result in positive outcomes for Australia and the region, both now and in the future."
"For us to support an overseas infrastructure project, there must be an Australian benefit (this could be a future or indirect benefit)," EFA's website says.
"We look to complement commercial finance and do not provide concessional loans, equity or grants."
"For larger projects, we can share risk with partners and encourage investment from other financiers to ensure that viable projects receive the finance required to proceed."
The government's budget update on Thursday showed that a loan to the PNG government had increased to $558 million (US$425 million), to help it with budget support and to handle the COVID-19 economic downturn.
In addition, the government is lending $238 million (US$181 million) to a PNG liquefied natural gas project.
SOURCE: THE THE AUSTRALIAN FINANCIAL REVIEW/PACNEWS