Digicel expects $1.6bn Pacific unit sale within weeks as shock tax goes to arbitration

Businessman Denis O’Brien’s Digicel has told its debt investors that the planned $1.6 billion (€1.56 billion) sale of its Pacific unit is expected to close by the end of July, after it agreed to enter arbitration to resolve a surprise Papua New Guinea tax bill that landed after the deal was struck.

Digicel executives told bondholders on a conference call in recent weeks that the company had agreed to put the $100 million in dispute into an escrow account, pending the outcome of a legally binding international arbitration process, according to sources.

The comments came as the telecoms group reported a rebound in earnings for its financial year to the end of March, after its results were hit by the Covid-19 pandemic in the previous year.

Digicel agreed last October to sell its Pacific unit for $1.6 billion upfront to Melbourne-based telecoms company Telstra, as it seeks to further reduce its debt burden, following a restructuring of borrowings in 2020 that saw bondholders write off $1.6 billion of what they were owed.

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The Telstra deal also involves a further $250 million consideration, subject to the business meeting certain earnings targets in the coming years.

However, Mr O’Brien’s company warned in early April that the timing of its planned sale of the business, dominated by its Papua New Guinea (PNG) operation, could be affected by what it called a “new arbitrary, company-specific tax Act” in PNG that had effectively landed it with the tax liability.

There were reports in the Australian press in the middle of May that Digicel was looking for the Canberra government, which is providing much of the funding for the Pacific unit purchase, to potentially cover the surprise tax bill in an effort to save the deal. However, Digicel dismissed these as “baseless and untrue”.

PNG, which is in the middle of weeks-long national elections, has agreed to waive a $14 million nonpayment penalty attached to the tax bill as the issue goes before arbitration.

Digicel, which has operations across more than 30 markets in the Caribbean and Pacific regions, had a net debt pile of $5.8 billion as of the end of March, according to sources.

The value of $925 million of its bonds that fall due in March 2023 fell 37 per cent to just over 60c on the dollar over the course of the first six months of this year, amid mounting concerns about the telecom group’s ability to repay the debt. Fitch, one of the world’s leading credit ratings agencies, said in a note last month that Digicel “faces significant refinancing risk” with the 2023 bonds.

Still, the full-year earnings release and outlook for the company’s current financial quarter was relatively upbeat, even as investors remained concerned about its exposure to emerging markets and currencies in a weakening global economy as well as mounting turmoil in the US junk bond markets, traditionally Digicel’s main source of funding.

Digicel’s reported service revenues for its financial year to the end of March rose 4 per cent to $2.2 billion, while its earnings before interest, tax, depreciation and amortisation (ebitda) grew at the same pace, to $972 million.

The company’s reported fourth-quarter revenue rose 3 per cent to $556 million, as unfavourable movements by some currencies of its markets wiped out much of Digicel’s 10 per cent increase in underlying revenue. Foreign-exchange movements also saw a 9 per cent increase in underlying ebitda being reduced to a flat reported performance.

Digicel told bondholders that it expected its underlying revenues for the current quarter to rise 8-9 per cent, and that earnings should expand at about half that pace. A spokesman for the company declined to comment on the results or what was discussed on the call with bondholders.