Exactly two years after Denis O’Brien’s Digicel put it up to its bond investors to write off $1.6 billion (€1.46 billion) from what they were owed or risk losing more in a liquidation, the businessman is facing his own gun-to-the-head moment as the company seeks to shave more off its remaining $5.5 billion debt mountain.
Digicel said on Monday that the timing of its planned sale of its Pacific operations, dominated by its Papua New Guinea (PNG) business, for an upfront $1.6 billion could be affected by a "new arbitrary, company-specific tax Act" that has effectively landed it with a $100 million-plus bill in PNG.
O'Brien's move last week to jet into the country's capital, Port Moresby, to lobby the prime minister, James Marape, to abandon the tax clearly was to no avail.
He’s now resorted to a public statement to warn of the “wider reputation and credit rating implications” for PNG by pursuing “this sudden, bizarre and unprecedented tax” and threaten potential legal action in the event that this “discriminatory” tax is not removed.
Junk territory
Digicel has a point. But is it one best made by a company that slid deep into junk territory among credit ratings agencies after its debt restructuring, or what Moody’s, for one, judged to be a default? Or a company whose own “aggressive” treatment of bondholders in the past (Fitch’s words) would limit future upgrades as its finances improved?
PNG treasurer Ian Ling-Stuckey told his nation’s parliament last month it would impose a “fair tax” on Digicel Pacific as part of national budget repair measures, in recognition of the company’s high historic level of profitability.
Digicel is said to pay an effective 41 per cent tax rate in PNG, when the local corporate tax rate and withholding taxes on dividends are considered. The proposed new tax equates to more than one full year of Digicel profits from PNG and is 2½ times its total annual corporation tax bill in the country.
Digicel Pacific's agreed buyer, Telstra, has not changed its business plan for the deal since the new tax was first mooted late last year. A spokesman has told Reuters that the PNG tax was a matter for the current owner of Digicel Pacific.
If Digicel goes down the legal route, the case could last more than a year, according to some reports. It’s not clear if O’Brien can risk trying to hold off closing the deal until such proceedings are finalised.
