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Digicel / Telstra - who wins?

The Village Explainer
Digicel / Telstra - who wins?
By Dan McGarry • Issue #51 • View online
The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.
This is part one of a two-parter on the proposed sale of the Pacific’s newest and biggest telco. Today, we ask who wins if Telstra’s government-backed bid for Digicel’s Pacific assets succeeds.
(Spoiler: The answer is Denis. Denis O'Brien wins.)

When the announcement dropped out of the blue that Telstra was Australia’s bidder of choice for Digicel, I wasn’t the only one at a loss for words. Despite widespread bemusement, turgid old Telstra seems smitten by this decidedly faded tropical telco.
Digicel going on the block was not news, of course. We’ve been aware of Denis O'Brien’s travails for years. In fact, his business model was questioned by many from the outset. O'Brien leveraged his string of national operations far more aggressively than virtually any other telco was willing to do.
And he took the money, and he built. He built into places that had never seen a cell tower before. In the process, he established a brand identity that inspired remarkable allegiance. O'Brien’s investment in Haiti saw mobile use rise from just 5% to 50% in about six years. During one period of unrest, while Port au Prince burned around them, citizens stood guard over the cell towers and equipment, aghast at the prospect of losing service.
Digicel took on the stodgy monopolists Cable & Wireless throughout the Caribbean. A knock-down drag-out regulatory fight in Jamaica provided O'Brien with some bitter lessons, but it taught him how to win. The company’s expansion into the Pacific led C&W to begin a slow retreat that would ultimately leave them divested of all their assets in the region.
In their campaign to push mobile services to the last unserved areas on the map, Digicel were aided by the IFC, (the commercial arm of the World Bank) and welcomed by most—but not all—Pacific governments.
People in Vanuatu were grateful for the assistance of the World Bank in liberalising and regulating its telecoms sector. For years, Telecom Vanuatu Ltd had been holding the country back, refusing to build out aggressively, insisting there was no money to be made in the islands.
So the IFC’s decision to back Digicel’s insurgency was a strategic win, as far as we were concerned.
Its pockets stuffed with cash from relatively low-interest loans, Digicel took the entire nation by surprise when it built 60 towers in 18 months, and turned all but one up on its first day of business. It was instrumental in pushing Vanuatu to the front rank of Pacific nations in terms of mobile and internet connectivity.
The nation had never seen a build-out this rapid and this big since 1942.
Within a couple of years, 85% of the population of Vanuatu had access to mobile services.
Digicel wasn’t so successful everywhere. The PNG rollout was fraught with political interference, as the incumbent telco pulled strings to slow Digicel’s onslaught. Even in a perfect world, building out into Papua New Guinea’s hinterland is a daunting prospect. This regulatory hostage-taking held them back for a couple of years.
In Solomon Islands, Digicel were certain they were in like Flynn. But a bit of political sleight of hand resulted in PNG’s BeMobile receiving the second mobile telecoms license.
In Fiji, Vodaphone already had a fairly strong mobile presence. Although Digicel was allowed in, it started in second place, and never managed to gain the lead.
(Since then, Fiji’s Amalgamated Telecom Holdings has become the regional insurgent, pushing the Vodaphone brand to Vanuatu and building a network from scratch in Papua New Guinea.)
Digicel’s Pacific campaign was waged by lobbyists as much as by engineers. The small army of technicians they deployed with each rollout were genuinely world class. They built quickly, they built cheaply, and they built well.
But the way was paved by people greasing the political wheels. Despite long years of practice in Ireland and later in the Caribbean and Central America, it seems his envoys were not ready for the Byzantine machinations of Pacific power.
O'Brien drove his lieutenants hard. He had hourly KPI reports sent to managers, and was notorious for the corporate game of musical chairs he encouraged at the top. Once he’d taken all the territory he could grab, he defended it zealously—overzealously, according to some. His regional legal team developed a reputation as attack dogs, fighting regulatory oversight tooth and nail.
O'Brien’s strategy was to leverage each operation to within an inch of its life in order to build, build, build. It proved to more risk-averse telcos that rent-seeking wasn’t the only game in town. Substantial profits were possible in even the remotest places.
This example, set by the company The Economist called a ‘brave minnow’, helped accelerate a massive expansion in telecoms services in the developing world.
It might have worked, too, if the Global Financial Crisis hadn’t hit when it did. Right when he was most exposed, O'Brien discovered that high-risk credit had simply disappeared. The crunch left his global operation saddled with obligations that stymied growth and reinvestment.
Within years, his operations were looking long in the tooth, technologically speaking. Others had learned to play his game, and while their agility only improved, his financial burdens hobbled him.
Fast forward to 2021. O'Brien’s Pacific operations remain profitable, but some analysts warn that they’re the only ones that are. Following a distressed credit swap, O'Brien’s company is still saddled with $5.5 billion in debts. Its credit rating has improved, but is still deep in junk bond territory.
It’s high time O'Brien cashed in his chips, and that appears to be what he wants. True to form, he’s angling for the best possible price, and he’s willing to play politics to get it.
Astonishingly, his transparent ploy of entertaining a bid from China—or at least not hurrying to quash rumours that he had—seems to have sparked a bidding war of one: Australia.
With little apparent reflection or analysis, the Government of Australia is backing a US $2 billion bid for the company’s Pacific operations. Reports are circulating that about $1.5 billion of this will be public funds. In the course of days or weeks, and without any consultation with Pacific stakeholders, Scott Morrison appears to have decided to plunk down an amount larger than the entire 2021 Pacific aid budget.
This has surely left Pacific leaders bemused and befuddled. In misguided pursuit of ephemeral security gain, the Australian government is willing to devote more than it has committed to assist with law enforcement, border protection, climate change, COVID-19, health, education and good governance put together.
And for what? Well, O'Brien will be fine no matter what happens. The company reported roughly $1.9 billion in dividends between 2007 and 2015 alone.
But a technical analysis shows that buying Digicel does little or nothing to change the security landscape, for Australia, for China, or for the Pacific.
Details about that not-so-minor detail in the next Village Explainer….
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Dan McGarry

The Village Explainer is a semi-regular newsletter containing analysis and insight focusing on under-reported aspects of Pacific societies, politics and economics.

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Dan McGarry - Port Vila, Vanuatu