Telstra Corp has agreed to procure the Pacific operations of telecom firm Digicel Group in a US$1.6 billion (S$2.2 billion) deal largely funded by the Australian government and seen as a way to contain China's rising influence in the region.

In a statement, the government will front US$1.33 billion of the total value, with Telstra contributing the rest, the Australian telco and the government.

Telstra first revealed in July the Australian government had approached it to help it buy the business.

In a statement, Andrew Penn, chief executive officer, Telstra says, "Digicel Pacific is a commercially attractive asset and critical to telecommunications in the region.”

"The Australian government is strongly committed to supporting quality private sector investment infrastructure in the Pacific region."

The transaction includes a US$250 million earn-out clause, subject to the performance of the business unit over three years, which could increase the overall value of the deal, Digicel said in a statement.

Digicel last year denied an Australian newspaper report it was considering a sale of its Pacific business to state-owned China Mobile as the heavily indebted telco restructured its business.

A sale of Digicel to a Chinese company would have been a cause of concern for the Australian government, amid rising strategic competition between Washington allies and Beijing in the Pacific region.

In recent years, China has provided funding for several Pacific infrastructure projects, increasing debt obligations in some small island nations, and has won international recognition from several countries that had previously aligned with Taiwan.

"Given the proximity of the Pacific to Australia and given the geopolitical issues between Australia and China, the Australian government was quite concerned about the idea of a Chinese company owning a major telecommunications company in the Pacific," said Amanda Watson, a researcher from Australian National University's Department of Pacific Affairs.

Diplomatic relations between the two nations have deteriorated in recent years, with China imposing trade sanctions on produce from Australia and reacting angrily to its 5G ban sidelining telecoms giant Huawei.

Australian telecoms analyst Paul Budde described the Telstra deal as a "political buy". "Will Telstra be able to take over and run that business in an efficient way that makes money? It's definitely possible but it will be a challenge."