Growing up in India, I would often hear about VSNL, the god forsaken government owned phone company that made it almost impossible to call overseas, thanks to their over-the-top charges for long distance calls. It seemed they wanted to penalize people for making long distance calls. But that was almost a whole lifetime ago. Now VSNL is no longer a government owned company. Instead it is the center piece of Indian conglomerate, Tata’s telecom play. For less than half-a-billion dollars they have put together a global network that is third biggest voice carrier – right behind AT&T and MCI. (Telegeography puts the combined company at #5, so I need to clarify this point!)
As you might remember, last year VSNL bought Tyco’s long haul network for $130 million and instantly acquired profitable routes in the fast growing Asian and Pacific Rim markets. The data traffic in that region is growing at around 100% per annum. Today Tata’s VSNL bought Teleglobe for $239 million, paying almost 22% premium to the current stock price. While it might seem a foolish move, given Teleglobe’s lack of profits, it can actually be a good one in the long term. Here is why:
- By buying a Bermuda based company they have chosen the path of least resistance. If they had tried to acquire a US based company, the regulatory process would have been long, and politically charged. Instead they went with a player that is based in Bermuda, but does most of its business from Canada. (I could not check if the company could end trading on Nasdaq, and this could be an outright purchase… no official details from the company as yet.)
- Teleglobe had acquired ITXC in June 2004, and that is still the largest VoIP player in the market. ITXC had about 5 billion in VoIP minutes (wholesale) ahead of its nearest rival, iBasis.
- Teleglobe gives VSNL connectivity in 14 developed countries in North America, Europe and Asia Pacific. VSNL now will have access to 17 countries in connectivity terms.
- Light Reading says Teleglobe has sprawling operations in 240 countries, has access to 80 sub sea cables, has more than 200 direct and bilateral interconnect agreements with fixed and wireless operators around the world, has 1,400 wholesale customers.
- TeleGeography says that when combined with Teleglobe’s wholesale voice operations around the world, VSNL will become the fifth largest carrier of voice minutes in the world.
What it means is that now VSNL can take all the capacity, and other traffic and start putting it on the Tyco network, and start squeezing out profits from this end of the business. I think one aspect of the business which many overlook is the ethnic market opportunities for VSNL. By connecting the Tata wireless and local wireline customers back in India to overseas Indians in US, Canada, UK and parts of Asia is the low hanging fruit for VSNL. Tata could use lower prices to lure customers to its local services in India, taking some of the sizzle out of its bitter rival, Reliance Infocomm. Irony of this whole thing – companies who had nothing to do with telecom are benefitting from the excesses of the telecom bubble.