The Telstra Corporation Ltd (ASX: TLS) share price is in focus today after it was reported that the telco may have walked away from a potential deal.
What is Telstra not going to try to buy?
It is being reported by The Australian that Telstra was in the running to possibly buy the Australian assets of Meridian Energy Ltd (ASX: MEZ). The telco was supposedly really interested in the retail energy division on the business, called Powershop Australia.
Telstra has been talking about expanding in the energy space for some time because of the synergies that it would create to allow it to be a large utilities player, not just a telco.
Why did the telco decide not to proceed?
Businesses don’t typically make announcements for why they didn’t do something. But The Australian referenced the deal that Telstra just made for Digicel.
Companies don’t have endless amounts of capital to make acquisitions, and Telstra has signalled it is trying to ensure its balance sheet is strong.
Earlier this week, Telstra announced that it has partnered with the Australian government to acquire the Digicel business in the South Pacific region for US$1.6 billion, plus up to an additional US$250 million subject to business performance over the next three years. The Telstra share price has risen around 5% since this was announced.
This business will be owned and operated by Telstra. The telco is only contributing US$270 million of the equity of the overall US$1.6 billion purchase price. The Australian Government is providing the rest of the money needed through a combination of non-recourse debt facilities and equity-like securities. Telstra will own 100% of the ordinary equity.
Telstra believes that Digicel is a commercially attractive asset and critical to telecommunications in the region. The Australian Government is supposedly “strongly committed” to supporting quality private sector investment infrastructure in the Pacific region.
The telco explained that it has a “strong” market position in the South Pacific region, holding a number one position in all markets other than Fiji where it is number two.
Digicel generated earnings before interest, tax, depreciation and amortisation (EBITDA) of US$233 million in the year to 31 March 2021, with a “strong” margin. Around 76% of its revenue is generated from its mobiles business, which is largely prepaid, and the balance is from business solutions, TV and broadband services.
It was noted that Digicel has already invested significant capital into PNG, which is its largest market, to achieve extensive market coverage. Including 4G to 55% of the population.
Management believe that Digicel will deliver an attractive internal rate of return and exceeds all of Telstra’s acquisition criteria including adding to earnings per share (EPS) and being better than a share buyback.
The transaction implies a multiple of FY21 EBITDA of between 5.8x to 6.9x.
Telstra said that whilst the transaction will not distract from Telstra’s T22 or T25 strategies, it is a unique commercial opportunity and will improve its outlook.
The telco concluded its announcement by saying the financial arrangements make it very attractive for Telstra, and it strengthens its relationships with the Australian Government and the Pacific region.