Digicel retains Citi to advise on possible $2bn Pacific unit sale

Digicel has retained Citigroup to advise on a possible sale of its Pacific operations, having received a number of uninvited approaches for the least-indebted part of businessman Denis O'Brien's telecoms group.

The unit could be worth about $2 billion (€1.64 billion), according to industry sources, based off the division’s earnings before interest, tax, depreciation and amortisation (ebitda) of $230 million for year to the end of March. Telecoms companies are currently valued at an average of 8-10 times ebitda.

A spokesman for Digicel confirmed that it has “received approaches from a number of parties in respect of its Pacific operations”. He declined to comment further on the talks with the parties, saying they are confidential.

The Australian Financial Review reported last week that several Chinese entities, including China Mobile, Huawei and ZTE are considering buying Digicel's Pacific unit. This includes the company's business in Papua New Guinea, one of its top three markets, as well as Fiji, Samoa, Vanuatu Tonga and Nauru.

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A liquidation analysis by KPMG for Digicel before the group started negotiations with bondholders on a distressed-debt restructuring deal earlier this year indicated that Digicel Pacific was the only part of the empire that would raise money in a wind-up scenario. The analysis concluded that the unit's assets could generate up to $615.2 million in a firesale.

Bondholders subsequently agreed to write off $1.6 billion of what they are owed, in order to avoid larger losses in a liquidation scenario. This brought the group’s net debt down to a more sustainable $5.3 billion. The deal involved the debt investors swapping their notes for bonds of a lesser value.

The KPMG report showed that Digicel Pacific’s own debt stood at $87.5 million. However, the unit was subsequently used as a guarantor for some of the notes issued by a holding company at the top of the group as part of the bond-swap transaction.

Reduce debt burden

A potential sale of the Digicel Pacific unit would most likely be used to further reduce the group’s debt burden and provide money for additional investment.

Digicel has spent more than $6 billion building telecoms networks and businesses across 32 markets in the Caribbean, Central America and Pacific over the past two decades. Mr O’Brien took at least $1.9 billion of disclosed dividends out of the group between 2007 and 2015.

The Australian Financial Review said the country’s government may offer financial support on national security grounds – possibly by way of loans or loan guarantees – to Australian bidders eying the unit, in order to thwart Chinese efforts to buy the business at a time of heightened geopolitical strain between both states.

The tensions ratcheted up a notch last month when China imposed tariffs of up to 212 per cent on Australian wine coming into the country. China is the main destination for Australia’s wine exports, accounting for 39 per cent in the first nine months of 2020. This follows earlier actions against other Australian goods, including some agricultural products, seafood and timber.