General Announcement::Telstra Digicel Pacific announcement - Transcript

26 October 2021	Office of the Company Secretary
	Level 41
The Manager	242 Exhibition Street
	MELBOURNE VIC 3000
Singapore Exchange	AUSTRALIA
Securities Trading Limited	General Enquiries 03 8647 4838
2 Shenton Way
Facsimile 03 9650 0989
#02-00 SGX Centre 1	[e-mail]
Singapore 068804	Investor Relations
	Tel: [phone]
	[e-mail]
ELECTRONIC LODGEMENT
Dear Sir or Madam

Telstra's Digicel Pacific partnership with the Australian Government - briefing transcript

I attach a copy of the transcript from the briefing held yesterday in relation to Telstra's Digicel partnership announcement, for release to the market.

Authorised for lodgement by:

Sue Laver

Company Secretary

Telstra Corporation Limited ACN 051 775 556 ABN 33 051 775 556

Telstra Digicel Pacific announcement, 25 October 2021 - Transcript

Introduction
Nathan Burley:	Hello everyone, and welcome. I'd like to begin by acknowledging
	the traditional custodians of the land on which I'm speaking today,
	the Kulin Nation, and pay my respects to their Elders, past, present
	and emerging.
	Today I have Telstra CEO, Andy Penn, and our CFO, Vicki Brady,
	on the line, to update you on this significant announcement we have
	made to the ASX this morning, our acquisition of Digicel Pacific.
	Andy will run through details on the acquisition, and Vicki will talk
	through some of the financials. We will then open for Q&A. Guy
	Wylie, Head of Corporate Finance, and Oliver Camplin-Warner,
	CEO of Telstra International, are also on the call today to answer
	questions. To ask a question, please press star one. When the
	investor Q&A is complete, I will hand over to my colleague, Nicole
	McKechnie, who will manage media Q&A.
	Andy, over to you.

Presentation from Andrew Penn

Andrew Penn:	Thanks very much Nathan. And good morning everybody, thanks
	for joining, particularly at short notice. And can I also just say
	hopefully everyone's continuing to do OK, and hopefully some of
	you are starting to enjoy the benefits of some new found freedoms
	with the lifting of restrictions.
	As Nathan said, today we are really excited that we are partnering
	with the Australian Government and announcing the acquisition of
	Digicel in the South Pacific. As you may have already seen from our
	previous ASX statements on this subject, we were initially
	approached by the Australian Government to provide technical
	advice in relation to this business, and we subsequently considered
	acquiring the business with financial and strategic risk management
	support from the Government.
	We also said that in addition to a Government funding and support
	package, that any investment that we did make would have to be
	within certain financial parameters, with Telstra's equity investment
	being the minor portion of the overall transaction financials. So I'm
	pleased to say that we've been able to achieve both of these
	outcomes, and that the Telstra Board has unanimously agreed the
	transaction is in the best interests of shareholders.
	The Digicel business will be owned and operated by Telstra. We'll
	contribute US$270 million of the equity to the [US]$1.6 billion
	purchase, and we will own 100% of the ordinary equity. The
	Australian Government, through Export Finance Australia, is
	providing the remaining [US]$1.33 billion through a combination of
	1

Telstra Digicel Pacific announcement, 25 October 2021 - Transcript

non-recourse debt facilities, and equity-like securities.

Digicel Pacific is a leading provider of communications services across Papua New Guinea, Fiji, Nauru, Samoa, Tonga and Vanuatu. The company has 1,700 employees who support around about 2.5 million subscribers, including 1,500 small to medium businesses, 250 large enterprises, and 200 corporates in PNG.

If I refer you to slide 3 of the ASX attachment, if you have it available there in front of you, you can see that Digicel enjoys a strong market position in the South Pacific region, holding a strong number one position in every market other than Fiji, where it is the significant number two.

Digicel Pacific has already invested significant capital in PNG, which is its largest market through its extensive network coverage, including 4G coverage to now, I think it's about 55% of the population. And the combined business generated EBITDA of US$233 million for the financial year ended 31 March 2021, which is at a very healthy 54% EBITDA margin.

Around 77% of its revenues is generated from its mobile business, which is largely prepaid, and the balance from business solutions, TV and broadband services. And again, if you're looking at the release with the attached slides, you can see that breakdown on slide 5.

When the transaction completes, which is obviously subject to obtaining the various different Government and regulatory approvals across the region, which we expect to take three to six months' time, just because of the number of jurisdictions that we'll be dealing with, and that will coincide with roughly when our corporate restructure is being contemplated and progressed. So we will run Digicel Pacific as a separate business within Telstra International, which will become, as I've previously said, the fourth subsidiary of our new Telstra holding company, in line with that restructure.

Given Digicel's strong brand equity and recognition in the region, and in alignment with our intention to operate Digicel Pacific as a separate business, the Digicel brand will continue to be used in Pacific markets. The current Digicel Pacific management team will also continue the day to day running of the business, and they will report to Telstra International executive, Oliver Camplin-Warner, who is with us today on the call. And it will be subject to oversight from the newly formed Board of Directors for Digicel Pacific Group, which will be comprised of majority of Telstra executives.

I think the deal represents a very important milestone in Telstra's relationship with the Australian Government, who are strongly

2

Telstra Digicel Pacific announcement, 25 October 2021 - Transcript

committed to supporting private sector infrastructure investment in the Pacific region. Australia has deep personal, historical and cultural ties with the Pacific, forged over decades of sustained engagement, and Telstra, via our International team, has been doing business there for decades.

We believe this opportunity is very attractive for a number of reasons. Firstly, the strong economics of the Digicel Pacific business. Secondly, the alignment with Telstra's core strengths. Thirdly, it also aligns our role as a provider of international voice data and ICT services to the South Pacific region. And lastly, as I've mentioned, the strong support of the Australian Government.

And it's also consistent with our recently announced ambition for our International business, which is to drive profitable growth and value from the growing strategic significance of our international network as part of our T25 strategy.

So Nathan, with those introductory comments, thank you everybody for hooking in and listening in. And as Nathan says, I'll now hand over to Vicki who can talk to you a little bit more about the financials. Vicki.

Presentation from Vicki Brady

Vicki Brady:	Thanks, Andy, and hi everyone. And let me add my thanks to you
	all for joining us at short notice. As Andy mentioned, Telstra is
	contributing US$270 million of equity to the [US]$1.6 billion
	purchase of Digicel Pacific. We will own 100% of the ordinary
	equity, and will consolidate 100% of earnings through our P&L.
	The Australian Government, through Export Finance Australia, is
	providing non-recourse debt facilities and equity-like securities
	totalling US$1.33 billion. Telstra will contribute US$50 million of
	equity to the additional US$250 million earnout for the vendor if the
	business performance hurdles are met.
	Under the agreement with Export Finance Australia, we are entitled
	to receive a preferred return of US$45 million per annum for the
	first six years. This means we expect to receive our initial equity
	investment back in dividends. After payback of our initial equity
	investment, Telstra equity returns are post debt repayments.
	The Government has provided US$720 million of competitively
	priced long term, that is 10 year, debt facilities, and their US$610
	million of equity-like investments do not have a term. A small
	component of the debt amortises each year.
	The debt is non-recourse back to Telstra. with no cross-default into
	any other Telstra debt or assets outside of Digicel Pacific. The
	3

Telstra Digicel Pacific announcement, 25 October 2021 - Transcript

US$720 million of Government funded debt will consolidate onto our balance sheet, and we remain committed to balance sheet settings consistent with an A band credit rating, as stated in our capital management framework.

The US$610 million of Government equity-like securities will be recognised on our balance sheet as a non-controlling interest, reflected in total equity.

Other support provided by the Government includes for cash repatriation from the regions, FX protections, and political risk insurance for six years. Telstra also cannot exit until after year 6.

The transaction is expected to deliver an attractive IRR, and exceeds all our M&A criteria. And just as a reminder, they are EPS accretive, ROIC above WACC, and more accretive than a share buyback of a similar size. We also expect the transaction to be accretive to earnings per share.

The transaction implies a multiple of 5.8 to 6.9 times FY21 EBITDA for Telstra for the acquisition of Digicel Pacific. This is based on the purchase price excluding the [US]$250 million of Government equity-like securities, that rank behind Telstra's ordinary equity with limited rights to distributions.

Digicel Pacific, as Andy just mentioned, also has attractive financials. Digicel Pacific generated US$431 million in service revenue, and EBITDA of US$233 million for the financial year ended 31 March 2021, with an EBITDA margin of 54%. We expect medium term capex to sales ratio for the business of around 15%.

Digicel Pacific has two and a half million subscribers, generating an US$11 ARPU. Our FY22 guidance does not include any allowance for the Digicel Pacific acquisition, which will further enhance our outlook, depending on the timing of completion. I would also note this transaction causes no change in our previous comments on capital management at our recent Investor Day, and from our Chairman at the AGM.

We continue to expect cash flow to remain ahead of accounting earnings, largely due to structurally lower capex than D&A, by around $600 million. This strong cash flow allows us to make this investment, whilst still maintaining flexibility to invest for growth, and return excess cash to shareholders.

I look forward to answering your questions. And I'll now hand back to you, Nathan.

Investor Q&A

4