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VSNL selloff seen hit by bidder's exit

Hopes that the Indian government can strike it rich from selling state-run telecom giant VSNL are fading fast following the exit of a major bidder, analysts say.

On Monday, a consortium of leading Indian telecom group Bharti Enterprises and Singapore Telecom pulled out of the race to acquire control of the company, saying it wanted to focus on developing its mobile business.

The consortium was among six suitors for the New York Stock Exchange-listed Videsh Sanchar Nigam Ltd, and, according to analysts, one of the favourites to win the company.

"The Bharti-SingTel pull-out is a setback to the privatisation," Sudhanshu Asthana, telecom analyst with Birla Sunlife Securities in Bombay, said.

"It was one consortium capable of shelling out big bucks. Their exit will definitely affect the price the government can fetch from the privatisation," said another analyst with a European brokerage, who did not want to be identified.

The privatisation of VSNL, a monopoly overseas calls provider and India's largest Internet access provider is expected to be wrapped up by the end of the year. It is one of the most ambitious sell-offs being undertaken by the government in a decade of economic reforms.

Though the government has set no value for the company, analysts' initial estimates of the value of the 25 per cent stake had been over $500 million, based principally on the market price of the shares plus a premium in case of aggressive bidding.

The government, which holds a 52.97 per cent stake in the company, is selling 25 per cent together with control to a strategic partner and another 1.97 per cent to VSNL's employees.

VSNL, though a government-run company, doesn't have a profile typical of other state-run firms. It is among India's most cash-rich companies with a cash pile of Rs 50 billion. Its staff strength, at just around 3,000 employees, is also unlike most state-run companies.

Second dropout

Last month, another bidder, the Birla group -- one of India's leading private conglomerates - also pulled out of the bidding.

This leaves just four out of the six original contenders in the fray -- the Tata and Reliance groups and separate bidding consortiums led by BPL Communications and consumer electronics group Videocon.

Even among them, the fate of the Videocon's bid for VSNL is uncertain after the government disqualified its bid for state-run carrier Indian Airlines after it was named by regulators in an alleged share-price rigging case.

Analysts said the race had narrowed down to just three contenders, only two of which had deep pockets.

"BPL does not have the financial muscle. And Reliance, which is the stronger of the remaining two, doesn't have a history of overbidding. They are unlikely to pay a rupee over the fair value," said the analyst with a European brokerage.

Analysts said VSNL's valuation would be hit and that was reflected in the company's share price which plunged 12 percent on Tuesday, reacting to the Bharti-SingTel announcement.

VSNL's share shed another 1.28 per cent to close at Rs 273.65 on Wednesday.

At Rs 273.65, the firm's 285 million shares are worth Rs 77.99 billion and the 25 per cent controlling stake is worth $413 million.

Dominates market

VSNL, with its linkages to 237 countries, more than 30 earth stations, more than 12 gateway switches and ownership in four submarine cables, offers suitors a ready-made infrastructure and instant market dominance on a platter.

But analysts say in the absence of aggressive bidding, negative factors, notably the expected loss of VSNL's monopoly over the overseas calls business, would weigh on the premium prospective suitors would pay for its stake.

The government has announced plans to end VSNL's monopoly two years ahead of schedule in April 2002 and throw open the business to unlimited private competition.

The company, which gets 90 percent of its revenues from the overseas calls business, also faces a major risk to its main revenue stream once the government permits the cheaper voice over Internet protocol after April next year.

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