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US and Australia move to block China buying Digicel

On Monday, Telstra Corp Ltd said it was in talks to buy the Pacific unit of telecoms firm Digicel Group in partnership with the Australian government in what is widely seen as a political blockade on China’s influence in the region.

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Telstra (OTC: TLSYY) said the government would finance most of the deal to buy Digicel, the Pacific’s largest mobile operator based in Jamaica, which operates in Papua New Guinea, Fiji, Samoa, Vanuatu, and Tahiti.

Digicel’s future has been the subject of speculation in the market and the media for months. Last year, the company denied an Australian newspaper report considering selling its Pacific operations to state-owned China Mobile (NYSE: CHL) Ltd.

The sale of Digicel to the Chinese company raises concerns for the Australian government in the strategic rivalry between the US and China’s allies in the Pacific.

“The Australian government is trying to achieve several goals at once. Digicel is a major player in the Pacific, and Australia sees it as a strategic asset that should not fall into the hands of China,” said Jonathan Pryke, director of the Pacific Islands Program at the Lowy Institute in Sydney.

“They want to bring Australian business back to the Pacific and realise they would have to fund it.”

A Digicel spokesman declined to comment. Zed Seselja, a spokesman for Australia’s Pacific minister, did the same.

An Australian Department of Foreign Trade spokesman said it was inappropriate to comment on “ongoing public trade negotiations”. Still, he said, “infrastructure partnerships are an important part of our movement in the Pacific”.

He said the government-supported companies investing in infrastructure in the Pacific, “including communications infrastructure, which is critical to the region’s economy”.

The Chinese embassy in Canberra did not respond to a request for comment.

Telstra said it was initially contacted by the Australian government “for technical advice on Digicel Pacific, which is a commercially viable and important resource for telecommunications in the region”.

“If Telstra proceeds with the contract, it will receive financial and government support to manage strategic risks,” the company said in a statement.

Telstra did not provide financial details, but Australian media reported that the deal would be worth about $2 billion ($1.5 billion) and that the Australian government would pay about $1.5 billion.

Using data provided by the media, Goldman Sachs (NYSE: GS) estimated the deal’s value at between A$1.9 billion and A$2.5 billion, with Telstra acquiring up to 30% of the debt.

According to the Sydney Morning Herald, the deal will require Digicel to defend its future earnings projections for three years.

Undersea cables

Australia has strengthened its presence in the Pacific with a $2 billion ($1.5 billion) infrastructure financing fund and joined a quartet with the US, India and Japan to counter China’s growing interests in the Indo-Pacific region.

Digicel, founded by Irish billionaire Denis O’Brien, has a dominant market share in Papua New Guinea and uses the Sydney submarine cable, built with funding from the Australian government, to expand data services in the country.

In 2018, Australia intervened in constructing a 4,700km (2,900-mile) Coral Sea cable that will connect Papua New Guinea and the Solomon Islands, concluding the first cable agreements with Chinese telecommunications company Huawei Technologies Co Ltd.

Australia, the US, and Japan are funding a submarine fibre-optic cable for Palau. Sources told Reuters last month that Nauru was in talks to build a submarine communications cable to connect to Australia’s network. Nauru has previously rejected China’s proposal.

Washington is pressuring governments worldwide to force Huawei and other Chinese companies to stop supplying sensitive communications equipment, claiming the company could transmit data to the Chinese government for espionage, which Beijing and Chinese telecommunications companies deny.

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