Telstra (ASX:TLS) share price on watch after announcing US$1.6bn Digicel acquisition

Telstra is making an acquisition…

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The Telstra Corporation Ltd (ASX: TLS) share price will be one to watch on Monday.

This follows the release of an acquisition announcement this morning.

Why is the Telstra share price on watch?

All eyes will be on the Telstra share price at the open after it revealed that it is partnering with the Australian Government to acquire the South Pacific-based telco, Digicel.

According to the release, the telco giant and Australian Government have agreed to pay US$1.6 billion upfront and up to an additional US$250 million. The latter is subject to business performance over the next three years.

Although the Digicel business will be owned and operated by Telstra, it will only be contributing US$270 million of equity to the US$1.6 billion purchase price. The Australian Government, through Export Finance Australia, is providing the remaining US$1.33 billion through a combination of non-recourse debt facilities and equity like securities. Telstra will own 100% of the ordinary equity.

“An important milestone”

Telstra’s Chief Executive Officer, Andrew Penn, notes that the partnership represents an important milestone in the company’s relationship with the Australian Government. He also highlights that Digicel Pacific is a commercially attractive asset.

Mr Penn commented: “Digicel Pacific is a commercially attractive asset and critical to telecommunications in the region.”

“Digicel enjoys a strong market position in the South Pacific region holding a strong number one position in all markets other than Fiji where it is the number two.”

The release notes that the combined business generated EBITDA of US$233 million for the financial year ended 31 March, with a strong margin. In light of this, the transaction is expected to deliver an attractive IRR and exceeds all Telstra M&A criteria. This includes being earnings per share accretive, ROIC above WACC, and more accretive than a share buyback.

Mr Penn added: “Telstra provided guidance to the market for FY22 at its recent full year results presentation and it also provided aspirations for FY23. These did not include any allowance for the Digicel Pacific acquisition which will further enhance our outlook depending on the timing of completion.”

Telstra’s CEO also stressed that the acquisition will not distract the company from its goals.

He explained: “The transaction does not distract from Telstra’s T22 or T25 strategies and represents a unique commercial opportunity. It is consistent with the Australian Government’s interest in encouraging quality investment in the Pacific, the financial arrangements make it very attractive for Telstra and it strengthens our relationships with the Australian Government and the Pacific region. The Board unanimously believes the transaction is in the best interests of shareholders and it is on this basis that Telstra has agreed to proceed with the acquisition.”

The Telstra share price is up 24% in 2021.

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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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