The recently announced $239 million acquisition of Teleglobe International Holdings by Videsh Sanchar Nigam Limited (VSNL) once again brings to the fore the Tata Group’s ambitions to become a global telecom player. The deal, which is subject to regulatory and shareholder approvals, will make VSNL the third largest voice carrier in the world. It will also make its presence in the global telecom market much more significant.
Listed on the Nasdaq, Teleglobe is a player in the wholesale voice, bandwidth and enterprise data market. The company owns and operates telecom networks that reach over 240 countries and territories, and services more than 1,400 wholesale customers of which 400 are mobile operators. It also has ownership interests or capacity in more than 80 subsea and terrestrial cables and carries over 13 billion minutes of voice traffic globally per year.
Teleglobe is an ideal investment for VSNL, which already carries 3 billion minutes of voice traffic each year. Combined with Teleglobe, the company will carry 16 billion minutes of traffic annually. Only global players like AT&T, which carries 18 billion minutes, and MCI will be ahead of VSNL in terms of volumes.
With this in mind, VSNL has decided to buy out Teleglobe’s largest shareholder Crberus, for $178 million. It is also assuming over $61 million worth of Teleglobe’s debt, making the total investment worth $239 million.
As part of the deal, Teleglobe shareholders will get $4.5 per share, a 22 per cent premium on the company’s $3.69 share closing on June 22, 2005. This, despite the fact that Teleglobe has faced financial distress in the past. The company filed for bankruptcy in May 2002 and is still making net losses. For instance, the net loss for the first quarter of 2005 was reportedly $8.4 million.
In any case, the deal will allow VSNL to achieve scale globally. Analysts believe that the price being paid is attractive for the huge acquisition that is being made. Once all the approvals are through, Teleglobe will be merged with VSNL Telecommunications (Bermuda) Limited, a wholly owned subsidiary of VSNL. The company expects the acquisition to be completed in the next seven to eight months after the necessary approvals have been obtained from the shareholders and governments in various countries.
The Teleglobe deal is part of a trend that is being seen in the Indian telecom industry today. Many telecom operators who have more or less established a national footprint are looking outwards. These companies have managed to become transnational or global players by acquiring debt-ridden networking companies at attractive prices. Reliance Industries is one such company. It entered into a similar deal when it bought the US-based FLAG telecom in 2004 for $211 million.
VSNL itself has followed this strategy in the past. It acquired Tyco Global Networks (TGN) in 2004 for $130 million. This deal gave it access to a 60,000 km (37,280 miles) network of advanced submarine cables spread over three continents ?? Asia, Europe and North America. It also gave it control over bandwidth which catered to 100 clients worldwide including some of the largest data carriers in the world. Now that the company also has Teleglobe in its stable, it plans to synergise the new company’s operations with those of TGN.
The company has a number of other overseas ventures going as well. In 2004, it launched a 3,175 km cable which connects Singapore to Tokyo and Europe. It is also actively participating in the South African telecom market. In February 2005, the company was awarded a 26 per cent stake in South African telecom operator SNO. This made it the second fixed line operator in the country and broke the monopoly of Telekom South Africa Limited. The Tata Group reportedly plans to spend $200 million in this region.
VSNL’s active involvement in the global arena is undoubtedly a positive step. However, it remains to be seen whether the Tata Group and other such Indian companies will be able to turn around the fortunes of the networking giants that they have acquired. It is important to note that these companies were up for grabs because of their precarious financial situation. In the process of going global, the companies should take care to not spread themselves too thin.
