Digicel Pacific Limited (TLS) Earnings Call Transcript & Summary

Hello, everyone, and welcome. I'd like to begin by acknowledging the traditional custodians on 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 our CEO, Andy Penn; and our CFO, Vicki Brady, on the line, to update you on the 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'll 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 the questions. [Operator Instructions] When the investor Q&A is complete, I'll hand over to my colleague, Nicole McKechnie, who will manage media Q&A. Andy, over to you.

Thanks very much, Nathan, and good morning, everybody. Thanks for joining, particularly at short notice. And then I also just say I hope everyone is continuing to do okay. And hopefully, some of you are starting to enjoy the benefits of some newfound freedoms with the lifting of restrictions. As Nathan said, today, we're really excited that we're partnering with the Australian government and announcing our -- the acquisition of Digicel in the South Pacific. As you may have already seen from our previous ASX statement 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 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 interest of shareholders. Digicel business will be owned and operated by Telstra will contribute USD 270 million of the equity to the $1.6 billion purchase, and we will own 100% of the ordinary equity. The Australian government, through Export Finance Australia, is providing the remaining $1.33 billion through a combination of nonrecourse debt facilities and equity-like structures and securities rather. Digicel Pacific is a leading provider of communication 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 for a second 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 number -- a strong #1 position in every market, other than Fiji where it is the significant #2. Digicel Pacific has already invested significant capital in PNG, which is its largest market through extensive network coverage, including 4G coverage to now, I think, it's about 55% of the population. And the combined business generated EBITDA of USD 233 million for the financial year ended 31st of 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, which is across the region, we expect to take 3 to 6 months' time just because of the number of jurisdictions that we'll be dealing with. And that will coincide roughly when our corporate restructure is being contemplated and progressed. And 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 a 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 committed to supporting private sector infrastructure investment in the Pacific region. Australia has a deep personal historical and cultural ties with 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 and talk to you a little bit more about it. Vicki?

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 USD 270 million of equity to the $1.6 billion purchase of Digicel Pacific. We will own a 100% of the ordinary equity and will consolidate a 100% of earnings through our P&L. The Australian government through Export Finance Australia is providing nonrecourse debt facilities and equity-like securities totaling USD 1.3 billion. Telstra will contribute USD 50 million of equity to the additional USD 250 million earn-out 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 USD 45 million per annum for the first 6 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 USD 720 million of competitively priced long-term, that is 10-year, debt facilities, and the USD 610 million of equity-like investments do not have a term. A small component of the debt amortizes each year. The debt is nonrecourse back to Telstra, with no cross-default into any other Telstra debt or assets outside of Digicel Pacific. The USD 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 USD 610 million of government equity-like securities will be recognized on our balance sheet as noncontrolling interest reflected in total equity. Other support provided by the government includes the cash repatriation from the regions, FX protections and political risk insurance for 6 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 6.9x FY '21 EBITDA for Telstra for the acquisition of Digicel Pacific. This is based on the purchase price, excluding the $250 million of government equity-like securities, that rank behind Telstra's ordinary equity, with limited rights to distributions. The Digicel Pacific, as Andy just mentioned, also has attractive financials. Digicel Pacific generated USD 431 million in service revenue and EBITDA of USD 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 2.5 million subscribers, generating an USD 11 ARPU. Our FY '22 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 G&A by around $600 million. This strong cash flow allows us to make this investment while 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.

Thank you, Vicki. I will now move to a time of investor, and shareholder, and analyst Q&A.

And our first question comes from Eric Choi from Barrenjoey.

First 1 was just on the impact to the balance sheet. Just wondering which parts of the EFA you'll consolidate onto your net debt. And then roughly how much Telstra's group net interest goes up as a result of this transaction? Second question, just around impacts on long-term free cash flow. At the moment, there's a $0.06 to $0.07 gap between EPS and free cash flow per share. And I'm just wondering, after we factor any working capital, any network upgrades above that 15% CapEx-to-sales target, if we can still, well, infer that this transaction is additive to that free cash flow and EPS gap. And then just a last question. Wondering if the completion of this deal helps at all with the timing of any of your other initiatives. I'm thinking of things like your buyback and also the [indiscernible] legal restructure.

Thanks very much. Eric, I'll get Vicki to take the bulk of those in relation to the balance sheet and the free cash flow impact. In terms of the impact on net debt, I think Vicki will confirm -- won't push it up, it actually push it down a little bit in terms of the cost of debt. But in terms of the impact on the buyback, it's obviously something that it was important to announce first, and then the Board will obviously have to make a decision around being in a position to do the buyback. So that is something that is important for us to announced in terms of -- it doesn't have a bearing on other factors I have mentioned in my comments that ultimately we will have this business effectively owned by Telstra International, which will be the full subsidiary there -- restructure, but it's not in that sense, depending on the restructure. But Vicki, maybe if I pass to you for those.

Yes. Thanks, Andy, and thanks, Eric, for those questions. So firstly, just in terms of the balance sheet and which components of the funding from EFA are reflected on balance sheet. So firstly, the senior debt that totaled USD 720 million, that will be consolidated into debt on our balance sheet. And the equity-like securities, that totaled USD 610 million, they will be consolidated into total equity as a noncontrolling interest. And just in terms of interest, so if I look at the debt, the senior debt of USD 720 million, the interest rate on that debt will be modestly below Telstra's blended cost of debt today. So very competitively priced debt on the senior debt. And so obviously, there will be some small increase in our overall interest costs. But as I said, competitively priced and modestly below our current blended cost of debt. Just in terms of free cash flow, so the acquisition of Digicel Pacific is accretive to us from a free cash flow point of view. And as I said, we expect that structural difference between accounting earnings and cash flow to continue. It doesn't affect that. So accretive from a free cash flow point of view. So I think I've covered off the questions you had, Eric, in terms of balance sheet and free cash flow. So Nathan, back to you.

Our next question is from Lucy Huang from BofA.

I've just got 3 questions. So in terms of that $45 million preferred return, I guess, within the next 6 years, is this got -- for that to increase at all? Or is there any circumstance that could see that $45 million recruit back a bit a lot faster? And then secondly, just a $250 million additional earn-outs, are you able to give us some color as to what are some of the performance totals that are embedded within those? And then just thirdly, with the Digicel business, I'm just wondering, moving forward, with this strategy, is this a story around subscriber growth? Or is there scope for ARPU growth? Just wondering where the growth investments will come from over the next few years.

Yes. Look, thanks very much, Lucy. It's Andy. Why don't I take the second complement? I think the answer on the first 1 is that I think there are circumstances in which the $45 million could be higher, but I don't think you should assume that. I think that, that's what we expect it to be. But I mean, the important point is that, that $45 million is sort of effectively underwritten, so that means that we get a payback of our equity by the sixth year. And at that point, we own the business 100%, obviously, subject to the outstanding debt liabilities and other equity-like instruments, but we own it a 100% at that point. In relation to the performance hurdles, I mean, as you can imagine, on deals like this to be as a potential acquirer, we take a somewhat conservative perspective of what the trajectory and the performance of the business will be in. And of course, we, if you like, make that even more conservative in the context of the current environment with COVID and just trying to understand what the impacts of that will be over the next short period of time. On the other hand, the vendor will have a perspective of what they think the business performance would be. So their business plan before we started the conversation has a slightly higher level of -- or has a high level of growth, particularly around revenue and subscribers and ARPU. And it's really the difference between those 2 perspectives that really determines the difference and the potential for the performance payment to be made. And I think, candidly, if the business does perform at a higher level, we won't be unhappy funding the increased consideration in conjunction with EFA because the business will be -- value will increase accordingly. I might ask Oliver Camplin-Warner, he might like to comment on the future for the growth opportunity for the business because he's going to be running it, and he spent quite a bit of time already on the ground and with the due diligence and as I have. And so -- but it would be good to hear directly from him maybe. Oliver?

Lucy, yes, I've been in market a couple of times now, a lot of our extensive due diligence. And when I look at the growth opportunities moving forward, I mean, 1 of the key ones [indiscernible] around mobile penetration. When we look at mobile penetration in PNG today, it's around the 30% mark. So we see a significant opportunity to leverage the extensive network footprint that they have rolled out. They have now some 964 sites across the country, really giving a unique source of competitive advantage, especially in those rural areas. The other part is you have a very extensive international business today, operating in over 20 countries around the world. And we believe there are a number of synergies between the 2 businesses there as well. So we do see a number of growth opportunities, which we're very excited about.

And I might just go back to Vicki and see Vicki if there was any additional comments to make in relation to the...

No, Andy, I think you covered them off well. And just the 1 that I'd make is on those performance hurdles for the additional $250 million related to the earn-out. For us, it would be great to hit those because, as you said, we've taken, as you would expect, a fairly conservative view of the performance of the business, if it achieves those hurdles. It's a good outcome for us as well in terms of overall multiples and returns on the deal. So that's the only add I'd put, Andy, so back to Nathan.

Thanks, Lucky. Thanks, Vicki.

Our next question is from Tom Beadle from UBS. .

I just had a couple, please. Just maybe starting on market structure. I realize there's probably a lot of detail we can go into here. But just any detail you can give us just around, for example, how many licenses are available in each of the markets? Is there potential for additional operators to enter these markets, whether it be with new licenses or spectrum auctions, for example? And just even understanding what the penetration of mobile services are in each of your markets. And then secondly, just around CapEx, how should we think about the CapEx requirements for Digicel? Is there a CapEx-to-sales target that we should use as a rule of thumb? Is -- how much needs to be spent on 5G and spectrum auctions or network expansion, for example?

Thanks very much. Tom, again, I might ask Oli to make a contribution here. He can talk to the market structure. I think the important point to appreciate is that PNG is obviously the biggest part of this overall portfolio. So we can sort of talk about Fiji and Nauru and Tonga, the other markets, but really PNG, I think, is the main area to focus on. Oli and -- I think Oli just referenced the market penetration rate in mobile are around 30%. And I think we have disclosed the CapEx-to-sales numbers in the materials. But Oli, why don't I hand over to you?

Yes. Thanks, Andy. Yes. As you said, PNG accounts for the largest sort of share of the business, that's about 80% of the overall business. In terms of market share, so Digicel Pacific is the #1 in each country, apart from Fiji where it's the second. In Nauru, there is only 1 player, and that is Digicel Pacific. We're very familiar with competitors that exist today across the other markets. Vodafone is probably the key other big player. We're also aware of a potential new entrant -- a new entrant in [ ATH ] as well in PNG. So we're very familiar with the back of our extensive due diligence on the competitive situation as it stands today, and what it sort of looks like moving forward. But without doubt, Digicel is in a very strong position given the investment -- the significant investments that it's made over recent years. And I'm very happy if [ Andrew ] go into more detail there because we've got quite an extensive understanding.

Yes. And look, I think it's fair to say as well, Tom. I mean, if you go to PNG, which, obviously, we have and we've had our engineers there, the key dynamic is building out a viable network. And Digicel over the last couple of decades has built a very extensive network in PNG. I think I mentioned in my comments has got 55% coverage in 4G already and a higher proportion in including 3G as well. That's very difficult to replicate as a competitor. The other operators have typically been in these markets, and this is where I think Digicel's really sort of built a very successful business has historically been sort of government-owned or supported businesses who typically haven't been running the same sort of commercial expertise maybe that are more of a dedicated telco heads. To put it in perspective, in PNG, 146 of the sites, you need a helicopter to get to. So it's very, very difficult to replicate that type of network infrastructure. So they have built a very strong presence. I mentioned the CapEx-to-sales. It's a strong EBITDA margin of 54% and CapEx-to-sales of around 15%. So you can see it's a very accretive and strong free cash flow business. But Nathan, back to you.

Okay. Great. Roger Samuel from Jefferies.

First 1, just on the competitive landscape. It's interesting just to know why the number of subscribers haven't really grown at 2.5 million. Is it the competitive pressure? Or is it because of the tourism with the closed borders? And secondly, I just want to confirm, the $610 million in equity-like securities, you have mentioned that it's noncontrolling interest, but I just want to confirm whether that's going to be a reduction to your profit on your P&L? Or is it -- yes, it's just a balance sheet -- yes, just a balance item?

I might get Oli to talk about the subscriber numbers and just the evolution of the market, and then maybe I'll just comment on the equity-like securities and see if there's anything that Vicki wants to add on that. So on the equity-like securities, I mean, essentially, I think as we've got in the materials, there's 2 dimensions to it. There's the -- a portion of $360 million, $250 million -- I can't member exactly how they described -- sorry, I don't think that page in front of me. But the $250 million, think about that really as a very long-term potential value opportunity for the -- detaches to that for the government. But then the $360 million really sort of ramps behind our ordinary equity, and it pays a coupon once we've got all of our equity back at a level, which, obviously, impact profit a little bit, but ultimately, it's a level of sort of a bit above our current cost of debt and below our weighted average cost of capital. So it's sort of in that allover things. So Vicki, anything else to add on those equity security?

Yes. And I'd just add, Roger was asking about. So the noncontrolling interest, yes, is a balance sheet recognition into total equity. Roger, the 1 thing I just would highlight that -- to think about is, as we think about the accounting for the acquisition, we will recognize, obviously, the net assets of the business. There will be some goodwill, and there's likely to be some intangibles related to the brand and the customers. And some of those intangibles will amortize. So that's just another element as you're thinking about the flow-through to the P&L. But the noncontrolling interest, yes, is a balance sheet entry into total equity. So Andy, back to you.

Thanks, Oliver. Do you want to take the question on subscriber numbers.

Yes. Thanks, Andy. Thanks, Roger. Yes, you're right. So there has been impacts around sort of the closure of borders. There's been a reduction in number of expats in country fly in, fly out with some of the operations there sort of not in full swing given all things COVID and then, obviously, an impact on the tourism front. So that's been a primary reason there. We are optimistic, though, with the skies actually opening up and to get to [ reach us to ] Fiji some positive signs coming out of there. So hopefully, we're looking forward to seeing that subscriber growth moving forward.

And I think the other thing to say, Oliver, is there's a couple of people on the call probably sort of familiar from other companies that you follow. There's a couple of very significant resource projects in the sort of -- excuse the pun -- pipeline in PNG, in particular, which will be quite material for the economy. And I think -- so that's one opportunity, I think, as we look forward. And I think the other piece which is a potential driver of growth or will be a driver growth is the further electrification of PNG as well. So I think when you look at it over a medium- to longer-term perspective, the opportunity for growth in subscriber numbers and our ARPU is relatively significant. As Oli said, obviously, COVID had an impact, actually, surprisingly, minimal impact, really, to be honest, in across the markets, modest, let me put it that way. And that's why we've taken a relatively conservative approach to the outlook and how we value the business over the next period of time, which has driven the purchase consideration and why there's an upside opportunity or an earn-out opportunity for the vendor, should the business perform in line with what the local team's plans had been. But back to you, Nathan.

Our next question is from Entcho Raykovski from Credit Suisse.

I've got a couple of questions. So the first 1 is around whether that any exit mechanisms built in either for Telstra or for the federal government into the agreement post year 6. I appreciate you've undertaking not to exit prior to that period. And obviously, you've got the preferred return over those 6 years. But I guess, interested in whether you could, I guess, put that -- put your equity interest to the federal government, whether you could be required to buy out the remaining equity at that point. And secondly, just in addition to the discussion so far on CapEx and your guidance around medium- to long-term CapEx of Digicel Pacific, is there a chance of the near-term CapEx may be higher than that 15% number which you've given? I guess just trying to work out whether there's a level of investment required near term to increase the 4G coverage, particularly PNG.

Thanks, Entcho. Andy. I don't -- look, I mean the CapEx decision is obviously within our control. I mean there's some modest demand obviously in the transition, but we're comfortable with where that -- I mean, strategically, it became important for us to further accelerate 4G will -- then maybe that's a decision we can make. But I think the impact would be reasonably modest in the near term, so I'm not expecting a big sort of CapEx surprise, if you can put it that way. And then I think, as you would imagine, obviously, we have obviously contemplated and considered exit, and that's obviously something that we've discussed extensively with -- obviously with the government. But suffice it to say that it's not our intention. We're buying this business with the intention to hold and run it, but it is -- we do have the ability to exit. And I probably can't say more than that on it just because as you can imagine. The terms of the various different instruments, et cetera, are confidential. So -- but as I say, on CapEx, maybe there's a small increase in the near term. But as I say, it's not -- I'm not expecting any CapEx surprises. I mean, I think we pretty much provisioned in what we need to do. And the business has been investing well. And as I say, they've already got 4G to 55% of the population. But Vicki, Oliver, anything I missed there?

That's spot on, Andy. As you said, CapEx-to-sales mid-to long-term 15% sales to CapEx. And as you said in the first few years, it might be slightly higher than that. But in absolute terms overall for Telstra, obviously, that's reasonably modest amounts of CapEx.

Right. Thank you. Our next question comes from Ian Martin from New Street Research.

Can you just -- I mean, focusing, I guess, more on Papua New Guinea, can you talk about what spectrum holdings there are? And are these long-term licenses like 15-, 20-year licenses or annual payments? Are there any payments, substantial payments or auctions coming up? And also, if you could perhaps indicate what kind of regulatory political issues are covered by the insurance?

Yes. Look, why don't I take the second one and then I'll get Oliver just to talk about the spectrum holdings in Papua New Guinea, in particular. I mean, basically, the political insurance is really to protect the sorts of things that you just sort of referenced, things like spectrum licenses and other licenses for doing business in unusual or sort of unpredicted situation. So it sort of ensures us against that political dynamic that were there to be an impact on...

Termination rates as well, Andy?

Sorry?

Termination rates. I mean that tends to be -- or I've seen it in the past, it tends to be a kind of foreign exchange issues sometimes, the way some of the small countries might deal with termination rates.

Yes. I'm not sure I can comment any further in on it. It's -- and obviously, it's really just to protect us in the event that there is a particular sort of type of political intervention that really impacts, and it protects our equity value in the business to cover us in relation to these markets. But I'm not sure I can say any more than that. But Oli, do you want to comment on the spectrum position?

Yes. Just...

Oli, we've lost you.

Can you hear me now?

Yes.

Perfect. Yes. So just on the PNG situation, can you just have their license renewed for a further 15 years that happened in the last couple of months. Clearly, we now need to work with the regulator just on sort of transferring that across. I have met with the regulator on 3 occasions in person and had a conversation this morning as well, so we'll just work that through, but the license has been extended for 15 years. Thanks, Andy.

Thank you. Our next question comes from Nick Harris from Morgans.

Just came to, I guess, understand the capital structure a little bit better that acquires the equity. So from what I -- actually, question 1, is it actually entitled to any dividends that come out of Digicel in the first 6 years? And then what sort of happens year 7? Does it kind of become ordinary equity, so it's entitled to the same stuff as Telstra equity? Could you just explain that again, please?

Vicki, do you want to take that?

Yes, sure. I can jump in, and then we do have Guy Wylie on the call as well who might want to jump in and comment as well. So Nick, just to confirm, so it's the equity-like securities. So out of that USD 610 million, that's $360 million that has discretionary distributions associated with it. And really -- so that's how I would characterize it. The second component, the $250 million is subordinated beneath our ordinary equity, and it really has limited rights to distribution, and it's more about sharing in the long-term upside out of the business. But Guy, do you want to jump in? You've been involved in all of the detail behind this?

Yes, I can, Vicki, thanks. So I think the way to think about the equity-like securities is that, as you said, Vicki, it's going to be classified as equity in our accounts. Second and importantly, it's nonvoting and nonrecourse to Telstra. It's perpetual, so there isn't a maturity date on that equity. It's deeply subordinated, and so it ranks behind our preferred return in terms of that 6-year dividend that Andy referenced at the start. And any payments are discretionary, and they're linked to the financial performance of Digicel. And as Vicki said, there is an upside sharing mechanism with the government. For example, we have sold the business post year 6 if we meet a return -- a very high return hurdle. That's all we can say on the securities because they are [ equity-like] instruments, but equity, perpetual and, obviously, deeply subordinated. Thanks, Vicki.

Just 2 more questions from me, if I can.

Sure.

So yes, just the COVID impact, I would have thought that COVID took a reasonable chunk of revenue in the last couple of years, but the revenue and EBITDA has been pretty well, at least the EBITDA has been growing year-on-year. Is that a function of the vendors taking a bunch of costs out of the business? And I guess a second part of that is, should we then expect a bit of a bounce back in EBITDA once borders open? And then my other question, just to get it off, was just around -- I know it sounds a bit silly, but 5G. I know it's all about 4G there, but should -- do you have any kind of plans to -- maybe in the [ CBDs ] and things like that? Do we need to think about 5G or for the next 6 years? Is it still really about getting that 4G coverage up?

Yes. Look, thanks very much. Nick, I might get Oliver to add some comments just in terms of the dynamics with COVID. But I think, as I mentioned, I mean it's obviously had an impact, but it's been slightly more modest than you might have otherwise have intuitively thought bearing in mind that PNG is the biggest overwhelming than the majority of all of this. And so obviously, less affected by tourism and such, but certainly affected by some degree of flying in, flying out workers. But Oli can talk on that 1. But the business has performed pretty well and held up well during COVID.And I think, as I say, I think that there is the opportunity for the growth to be slightly stronger in the future. It's a bit hard to sort of say in a sense because it's still hard to know sort of where we're at in the whole COVID journey. I like to be optimistic and think things are going to get better next year. And I think Fiji is an example is [indiscernible] out opening up its border, I think, quite soon. So that's pretty positive. I think on 5G, look, it's pretty early days. We are really focusing on continuing to extend the 4G coverage, but 5G will become relevant over the longer term as well. As much as anything else is a bit the case in Australia is that 5G, obviously, is a more efficient technology than 4G. So from a capital cost perspective, it could improve your overall capital efficiency from the point of view of the cost per gigabit of data over the network is lower than 4G. But until really data volumes grow very materially in these markets, that's not so much an issue. But Oli, do you want to talk a bit more about the COVID dynamics across the markets?

Yes. Probably not a lot to add, Andy. I think you've covered quite a bit. They have managed the business very well through what has been a tough period. But yes, not anything else I'd add on the COVID front. In terms of 4G, 5G, I mean they're still heavily reliant on 2G and 3G. So they have about 55% population coverage on 4G today and they still rolling that out across the country. We've had a number of conversations with them on 5G, whether or not there are any use cases in the metro areas, but that's not on the near-term strategy. So it's something we'll keep across should the deal complete?

Next question will be our last from the analyst. We'll then go to media. [Operator Instructions] Our next question is from Nick Harris from -- correction, from Brian Han from Morningstar.

I may have missed the answer to 1 of the previous questions, but can you please talk about the key drivers of the margin increase for Digicel in recent years? And secondly, in terms of the, on-the-ground running of Digicel after the deal closes, I know Oliver will be in charge there. But will there be many senior executives from the other 3 arms of Telstra who will be assigned there? And will Mr. O'Brien still be actively involved in the day-to-day management?

Thanks very much, Brian. Why don't I make some comments and then see if Oliver wants to add anything. I think in terms of what's really driven the strong performance of the business, I think if you look at the Digicel businesses globally, they've been incredibly well managed. I think that have driven strong growth in subscribers and ARPUs and manage costs very efficiently. And I think the scale benefit of that has led to pretty healthy margins. As I mentioned, the EBITDA margin is about 54%, so it's a very well-run business. In terms of -- on the ground, there's about 1,700 employees across the Digicel group in the Pacific, obviously, overwhelmingly, they're obviously all based in market. It's a very, very strong team. And as Oliver said, both here and our colleagues have been in Papua New Guinea met the team. It's mainly a local team. There are a couple of expats in senior positions, but that people that exist within and within the markets for a good number of years. We don't propose to change that, and we don't propose to, and don't feel we need to allocate more a large number of senior executives from Telstra into the businesses that were already very well run. And we'll run it relatively independently through the Board coming up to all of it. But Oliver, do you want to add any other comments to that?

Yes. Thanks, Andy. I'll just add that, as part of Telstra International today, as I said earlier, we operate in over 20 countries around the world. We're very used to operating in complex environments as a sort of complex governance regulatory setups. So this is not new to us. We're very used to sort of operating in different countries. In terms of the team, as Andy said, we've been very impressed with the leadership team that is in place today. And we'll make sure that we retain that, the key individuals moving forward. Just on PNG, I mean they have just -- when you visit in country, it's amazing. They are literally -- there's a Digicel umbrella on every single street corner. The distribution that they have, the sort of the sales channel that had in place, they really is second to none. So we'll be looking to protect that to protect the leaders that are in place, but then bring the Telstra International governance just to sort of -- to manage it and operate it moving forward.

And sorry, I didn't [indiscernible] Denis O' Brien, so Denis, it's the intention that Denis will stay on the Board for the first couple of years or so and to help us navigate the transition.

Thanks, Andy. Thanks, Oli. I'll now hand over to my colleague, Nicole McKechnie, who will manage the media Q&A.

Thanks very much, Nathan, and welcome, everyone. I think at this stage, we have call -- one media call. [Operator Instructions] But the first 1 is from Lucas Baird from the AFR.

I was just wondering about that extra $250 million that could be kicked in, if certain targets are met. I was just wondering what are the targets that Digicel has to meet to get that? And will the government or Telstra be funding that increase? And then just a second 1 on potential exit strategies to Telstra. From what I see, all the timeline horizon seem to be like 6 years in the material on the ASX at the moment. So is that the point that you will be looking at trying to exit Digicel?

Lucas, Andy. So look, you should not interpret the 6 years of any signal of an intention to exit. We're not entering this with a view to exit. We are entering this due to running this business as a successful business over the longer term. The point for 6 years, though, is that we wanted to make sure the -- that we basically had effectively a clear line of sight to the payback of our equity of $270 million, and that's effectively what happens at that point. So we get to that point. But you shouldn't interpret that as being a signal for an intention to exit at that point. In relation to the hurdles and the earn-out, essentially, I think as I was talking a little bit early, I'm not sure if you're on the call, but when you do an acquisition like that, there's a position of the vendor looks at the business and has a point of view and then -- sorry, the acquirer and then of course, the vendor has got a point of view about the business. And to vendor's point of view is obviously based on their history and performance. We're taking a more conservative point of view, particularly against the background of COVID and the uncertainty that, that creates and the difference between the 2 is really a function of those perspectives. And as we said earlier, if the business performs in terms of revenue, as an example, above what's in our model and closer towards the vendors model where the vendor is at, then that would trigger the earn-out payment. And we would be happy with that because actually it would mean the business is valued more. And I think I'm right in saying that, actually, on a multiple basis, we actually would be acquiring the business slightly less -- lower multiple than going in. So that's good. And then in terms of how that's funded, the split is 80-20 EFA to Telstra. So we would pay 20% of the -- sorry, the extra earn-out payment and then EFA will fund 80% of it.

Next up, we've got Dave Swan from The Australian.

Just a couple of quick questions from me. Obviously, the deal has been sort of under discussions for the past few months and it seems to have been sort of quite a lengthy process as you'd expect it to be. Can I just have some color in terms of, I guess, just those discussions over recent weeks and months and just some color about, I suppose, any detail that can be shared as to getting this over the line. And anything you can say just about the politics, too. And I guess, just overarching sort of what this means from a geopolitical standpoint for the region.

Thanks, Dave. I'm not sure I can share color on the discussions. I mean, I think obviously it's -- I don't want to describe it as a complex. It just is a deal with a number of stakeholders involved when you think about its multi-jurisdictional. On the one hand, obviously, it's with doing due diligence in an environment where we're dealing with restrictions as a consequence of COVID. So that sort of made that a little bit -- took a little bit more time. We've done very extensive due diligence, including on the ground due diligence. I think you heard us say previously, I've been in market, and my colleagues have been in market and that network teams up there. We've had independent consultants. We've done a lot of work there. And then as you can see, the funding and the support package from the government has got 3 key elements to it, the senior debt and then 2 types of equity securities and then the political insurance risk. So there's a lot in all of that. And so just -- there's a lot of stuff to work through. And I think that's probably all I can say in relation to the discussions. On the question about sort of geopolitics -- and I'm not probably an expert there -- but I mean, if anything, I would say, look, we've been doing business in the Asia Pacific region and the Pacific region for many, many decades. And we operate in more than 20 markets around the world, and we deal with lots of different regulatory regimes. And I think that we're well positioned to navigate our way through these markets as well. And it's a very attractive business. It's performing very, very well. And I think, obviously, the region has very strong ties with Australia. I've spoken to each of the Prime Ministers, in each of these markets, and they're very well disposed to Telstra's involvement. So it's probably as much as I could say there.

Thanks, David. Next on, we've got Simon Dux from CommsDay.

Just got a question regarding the fact that Huawei is a strategic vendor and partner of Digicel in Asia Pac. ZTE is a global strategic partner of Digicel. What operational regulatory and procurement issues does this present for Telstra going forward?

Thanks, Simon. Well, I don't think it presents any regulatory issues going forward. There's no restrictions in relation to views of radio access network vendors. And also just to point out that in -- even in Australia, obviously, where there is that in relation to 5G, not 3G or 4G. 1 of the things that we will obviously be working on, if and when I'd say, if I'm suggesting it's not going to, but when we complete because we've obviously got to go through the regulatory process across in each of the markets. And I don't anticipate any issues there, but it does take some time. I say, 3 to 6 months, I think. We'll obviously work with the local team on a longer-term network plan, taking into account our partnerships as well because we've got strategic partnerships as well and some of the considerations from our perspective around the optimal network design and operational networks in the region. So we'll obviously take that into account at that time, but there's no issues in the sort of the short to near term in relation to that. I think it's really just a function of us determining what the right long-term network strategy is.

Thanks, Simon. We have a call. [Operator Instructions] We have a question from Josh Taylor from the Guardian.

Just a quick question regarding Digicel. So I understand that Digicel is incorporated in Bermuda, as -- is there any sort of concern from Telstra about, I guess, being involved in the transfer of large sums of tax pay dollars to a country that is essentially a tax haven?

Actually, Guy, who's on the line, can talk about the exact mechanics of the completion of the deal. But as far as we're concerned, we are -- I mean, Digicel is essentially a business which operates in a number of island markets around the world, either located in the Caribbean or in the Pacific. And the Caribbean is, if you like, the main business and so the holding company and operates, I think in some like 22, 23 markets in the Caribbean. So it's not, I think, necessarily unusual, therefore, that that's where the holding company is. But Guy, I don't know if you have any comment just in terms of how the transaction completion mechanics work.

Yes. Thanks, Andy. Look, no comment on that. We don't comment in terms of where fund flow goes. But obviously, we're going to own and operate this business out of Australia. So that's all to say on that.

Thanks Josh. Next up with, we've got Stuart Condie from The Wall Street Journal.

I guess this is a follow-up from a previous question. When did the government initially approached Telstra to request for advice? And how long did it take for those talks to turn to Telstra taking an ownership interest? And also, I guess, given the Pacific step-up program, was the government's request for advice confined solely to Digicel Pacific? Or are there any other assets or areas of discussion?

I think in relation to the second 1, I think I'm safe to say that we approached up for advice in relation to Digicel, and that's what the conversations have been -- contain, too, and they haven't sort of gone further than that. And I'm just trying to think exactly when we were initially approached. Everything is sort of lost a bit of perspective at the time in the context of COVID, haven't been sort of in locked down for such a long period of time. I mean, I think we would have been working on this for last maybe or so, something in that order. And as I said, initially, it was in relation to providing strategic advice. And then ultimately, that led us to thinking about potential acquisition in partnership with government with those various different arrangements, the support package, the funding package, the insurance package, all of those protections. So it probably can't remember exactly when the talks change. I don't know if they change that overnight. But obviously, we've become more familiar with the asset over the period of time we've been discussing it with the government.

That appears to be our last media question at this point in time. Andy, any last comments from you before we wrap?

No, look, I don't think so. Thank you, everybody, for dialing in. And it's obviously a very significant transaction. And as I mentioned in my introductory comments, consistent with our ambition to drive profitable growth and value from the strategic significance of our international networks. And we've been doing business in Asia and the Pacific region for many decades and including in PNG. So I think we're very excited by this opportunity. But thank you, everybody, for your interest and for dialing in today.

Thanks, Andy. Thanks, everyone.