Summary:

Flag Telecom, an undersea cable operator owned by India’s Reliance Communications has cancelled its $1 billion IPO due to market conditions. The failure to launch has implications for its debt laden parent, which is trying desperately to find a way out of a $7 billion mess.

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Flag Telecom, a large international network operator that connected countries in Europe with Middle East and Asia with the U.S., is shelving its $1 billion dollar initial public offering. The cancellation is a huge set-back for its parent company, Reliance Communications, which has been desperately trying to reduce its $7 billion in debt. The IPO was seen as a way to quickly slash that debt. Reliance was looking to list Flag Telecom via Singapore-based business trust, Global Telecom Infrastructure Trust (GTIT) on the Singapore stock exchange.

The IPO market has been a bit of a mixed bag these days. While some of the more seasoned U.S.-based technology companies have managed to post good first-day results, the failure of Flag is a reflection of a weakened global economic environment. There is some disdain for older cable infrastructure, especially the kind owned by Reliance.

The Reliance quandry

In order to understand the Flag Telecom IPO cancellation and its implications, let us take a step back into time. During the early part of the century when telecom companies in the west started dropping like flies, the then-high-flying telecoms from emerging economies like India swooped in and bought assets of the failed (or struggling) operators. Reliance was one of those companies. It bought Flag for $207 million. It also acquired Yipes, a metro ethernet services provider based in San Francisco for about $300 million. Reliance was using the heady growth of its Indian telecom businesses to expand globally.

A few years later, that dream of telecom domination has come to an end. Reliance was essentially a family-owned (but publicly traded) company that was co-owned by Anil Ambani and his brother Mukesh, who had inherited it from their father, Dhirubhai Ambani. In a plot right out of a Bollywood blockbuster, the two brothers carved up their father’s empire and went their separate ways, both professionally and personally. Their spat became ugly and was played out int the media, till their mother tried to broker an uneasy truce.

Mukesh ended up with energy and other assets and Anil got the communications business. Since then, their fortunes have diverged. The Mukesh side of the family aka Reliance Industries has benefitted from the growing demand for energy in India, and as a result, has been able to use that to expand into other arenas including telecom and retail. The Anil faction however has run into heavy weather especially as the competition in the Indian telecom market has become more intense.

In a news report today, Reuters’ Jeff Gelkin writes:

A desired sale of its telecoms tower unit, which was expected to raise about $3 billion from private equity investors, has dragged on for almost two years, while an earlier plan to sell a stake of up to 26 percent in the parent itself found no takers. No wonder Reliance has lost 42 percent of its value in the past 12 months, leaving it with a market capitalization of just $2.3 billion. Reliance is now left with huge borrowings it can’t seem to pare and an underlying business that looks weak. The group’s average revenue per user had fallen to $1.77 in the last quarter of 2012 from $7.63 in 2008. It has 17 percent of the Indian market by customer number but only 9 percent by revenues.

Ironically, the Flag Telecom IPO cancellation comes at a time when demand for bandwidth is increasing worldwide, thanks to hefty growth in cloud services  and increasing demand from consumers.

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