Telstra share price: potential Digicel acquisition in focus

Rumours and speculation are often the driving force behind financial markets.

Last week the Australia Financial Review (AFR) ran a story titled Telstra called in to block Chinese telco bid.

In it, the newspaper speculated that the Australian government had approached Telstra (ASX: TLS) in regards to jointly acquiring Digicel’s mobile network assets.

Digicel, for reference, is a large mobile and entertainment-focused telecommunications company with operations across 32 markets, including Fiji, Papua New Guinea, and Dominica. The telco currently boasts over 13.2 million customers and has steadily grown its geographic reach since its founding in the 2000s.

Confirming speculation

Telstra on Monday confirmed the media speculation about a potential acquisition, revealing it had held talks with Digicel Pacific regarding a potential joint acquisition with the Australian government.

The telco stressed that at this current stage the discussions with Digicel remain incomplete, stressing that there is no certainty that such talks would result in a transaction.

Telstra built out the story expounded by newspapers last week, saying it had been approached by the Australian government to provide technical advice on Digicel Pacific. How that provision of technical advice, pivoted to a potential joint acquisition, is not exactly clear.

What was clear however, was that if Telstra was to acquire Digicel through a government backed bid, there would be a number of important qualifications.

For one, it was noted that 'If Telstra were to proceed with a transaction it would be with financial and strategic risk management support from the Government.'

And two, beyond those considerations, it was noted that 'In addition to a significant Government funding and support package any investment would also have to be within certain financial parameters with Telstra's equity investment being the minor portion of the overall transaction.'

Putting a number on Digicel’s expansive business operations in the Pacific, Telstra revealed that the telco brought in earnings (EBITDA) of USD$235 million in calendar 2020. That performance was made 'with a strong margin, as well as extensive network coverage,' it was noted.

The Telstra share price was lower at the time of writing, though remains up close to 25% since January.

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How much is Digicel worth?

According to reports from The Irish Times, Telstra 'made a $2 billion [...] bid for Digicel's Pacific operations', implying an EBITDA transaction multiple of ~8.5x. Those reports, it should be noted have not been confirmed by Telstra.

Rather, Telstra’s management said they would update the market on further details where appropriate.