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VSNL sale transforms India's telecom sweepstakes

The privatisation of state-run telecom giant Videsh Sanchar Nigam Limited has paved the way for the emergence of a third integrated service provider in India, expected to be the world's fastest-growing phone market in coming years.

The Tata group, India's second-largest conglomerate, is now poised to challenge Bharti and Reliance, the two other groups best positioned to grab big chunks of a market now worth around $8 billion -- and projected to double in value over the next three years.

"What we did not have was international long distance and national long distance operations. The missing picture is filled in by VSNL," S H Rajadhyaksha, senior vice-president, finance of Tata Industries, told Reuters.

On Tuesday the government declared Tata the winner of the bidding for VSNL, the monopoly provider in India of international phone service and a large Internet access provider. Tata bid Rs 14.39 billion for a 25 per cent controlling stake, bettering that offered by Reliance, the only other bidder.

With VSNL comes control over the nearly $1.5 billion-a-year overseas calls market, more than 660,000 Internet customers and a licence to enter the $2.8 billion domestic long-distance market.

The acquisition transforms Tata from a two-bit player into a major force in the telecoms sector. It previously had only one fixed-line network and licences to provide local service in four additional regions, and a 33.33 per cent stake in Birla-AT& T-Tata, a mobile phone joint venture with US giant AT& T and India's Birla group.

The government has thrown open most parts of the telecoms sector to unlimited competition, presenting private companies with an opportunity rivalled only by neighbouring China.

Global technology research firm Gartner last August said it expected India's mobile phone industry to grow by a compounded 52.5 per cent through 2005 to 30.9 million subscribers, double China's 26 per cent growth. Fixed-line subscribers were expected to jump to 83 million by 2005, it said.

BIG IS BEAUTIFUL

"Clearly, the telecom game will be all about scale. The more areas you're in, the more customers and the more your revenues," said an analyst with a European brokerage.

The cost of building a system big enough to compete has spawned a wave of mergers and acquisitions in the business, with well-funded groups snapping up smaller, weaker players.

Last June Birla-AT& T-Tata and BPL Communications announced a $2 billion merger to create India's biggest mobile company. Groups such as Bharti Enterprises and the Indian unit of Hutchison Telecom have acquired several smaller mobile companies in the past two years.

The allure of telecoms has also ensnared India's largest private conglomerate, the Reliance group, a petrochemicals and refining giant with $12.5 billion in annual revenue.

Reliance is investing around $5.13 billion over five years to connect the country with a 60,000 km fibre optic cable network, over which it plans to offer a whole range of telecom, Internet and entertainment services.

Mumbai-based Reliance plans to begin providing land-line and non-roaming mobile services across India this year. And last month Reliance paid Rs 1 billion and provided a Rs 4 billion bank guarantee to acquire a domestic long distance licence.

Control of VSNL would have helped complete the picture.

BIG BOOST TO SECTOR

Analysts say the privatisation of VSNL could draw a flood of foreign investors into India.

"This will help overseas investors sit-up and take notice. You can expect to see good interest for MTNL whenever the government decides to privatise it," said Navneet Singh, telecoms analyst with ICICI Securities and Finance Co.

When India started opening its telecoms sector in the mid-1990s, it drew a lot of foreign investors. But many left disappointed by the slow pace of reforms and frustrated by regulatory inconsistencies.

But investors are now trooping back, heartened by the dazzling growth rates projected for a country with one of the lowest phone penetration rates, a billion people and one of the highest economic growth rates in the world.

In the past 15 months Singapore Telecom, Warburg Pincus and other foreign investors have invested more than $1 billion in Bharti Tele-Ventures, a key company of New Delhi-based telecoms group Bharti Enterprises.

The amount invested by Singtel is its second-largest in a foreign company after its acquisition of Australian telecom group Optus Ltd.

This month, Bharti wrapped up the first ever initial public offering by an Indian mobile company, raising Rs 8.34 billion for a 10 per cent stake. That valued the entire company at around $1.7 billion.

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