Is the Telstra (ASX:TLS) share price good value amid acquisition news?

The Telstra Corporation Ltd (ASX: TLS) share price was out of form and dropped lower with the market on Monday.…

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The Telstra Corporation Ltd (ASX: TLS) share price was out of form and dropped lower with the market on Monday.

The telco giant’s shares ended the day 0.3% lower at $3.76 even though it responded to media speculation.

What happened to the Telstra share price?

The Telstra share price came under pressure despite the telco giant confirming that it was in discussions regarding an acquisition.

This morning Telstra revealed that it has been in talks to acquire South Pacific telecommunications company Digicel Pacific in partnership with the Australian Government.

Digicel Pacific was founded in 2006 and is a leading provider of communications services across Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu. It has a strong market position and an extensive network coverage in the region. In calendar year 2020 it generated EBITDA of US$235 million and strong margins.

The release explains that if Telstra were to proceed with a transaction, it would be with financial and strategic risk management support from the Government. As well as significant Government funding and support package, any investment would have to be within certain financial parameters. This would mean that Telstra’s equity investment is the minor portion of the overall transaction.

Reaction

In response to the news, analysts at Goldman Sachs have retained their buy rating and $4.20 price target on the Telstra share price.

This implies potential upside of ~12% over the next 12 months excluding dividends. Including them, it stretches to ~16%.

At this stage, it is too soon for any changes to its estimates. However, the broker doesn’t appear to be objecting to the move.

Goldman commented: “Any acquisition would be in partnership with the Australian Government, with Telstra to only have a minor portion of the equity, and the Government would also provide Telstra with a significant funding, support, and risk management package (i.e. media reports suggest that Telstra has asked Digicel to underwrite its 3Y revenue.”

“Telstra noted that Digicel Pacific generated EBITDA of US$235mn in CY20, with a strong margin and extensive network coverage. We currently value Telstra International at 7.0X EBITDA. Using a similar multiple range for Digicel of 6-8X EBITDA, this implies a potential EV for Digicel of A$1.9-2.5bn. Assuming 3X gearing (vs. 1.9x for TLS but factoring in government support), the equity would then be worth A$1.0-1.6bn. This would imply that the speculated $200-300mn equity investment would represent 15-30% equity ownership,” it added.

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Motley Fool contributor James Mickleboro has no position in any of the stocks mentioned. The Motley Fool Australia’s parent company Motley Fool Holdings Inc. has no position in any of the stocks mentioned. The Motley Fool Australia owns shares of and has recommended Telstra Corporation Limited. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.

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