VSNL Pays $239M for Teleglobe

Indian national operator Videsh Sanchar Nigam Ltd. (VSNL) (NYSE: VSL) is staking its claim as one of the world's most important international carriers with a $239 million bid for Teleglobe International Holdings Ltd. (Nasdaq: TLGB). (See VSNL Pays $239M for Teleglobe.)

The bid's valuation includes assumption of Teleglobe's $61 million of outstanding debt and a payment of $178 million, or $4.50 per share (22 percent above Friday's closing price), to shareholders. The news sent Teleglobe's stock rocketing by 62 cents, nearly 17 percent, to $4.31, while VSNL's share price jumped 73 cents, more than 4 percent, to $17.61.

The current Teleglobe was established in September 2002 when Teleglobe Inc. was acquired for $155.3 million by a holding company set up by Cerberus Capital Management and TenX Capital Partners, a process that was completed in June 2003 (see Teleglobe Acquisition Complete).

The move is significant for a number of reasons. First, VSNL claims the acquisition makes it the third biggest global player in the international voice market, behind AT&T Corp. (NYSE: T) and MCI Inc. (Nasdaq: MCIP). France Telecom SA (NYSE: FTE) and Deutsche Telekom AG (NYSE: DT) are also major players in this market.

Second, it puts even more international business and firepower into VSNL's hands following the Indian company's acquisition of Tyco International Ltd.'s (NYSE: TYC; London: TYI) global submarine telecom network, announced last November (see VSNL Buys Tyco's Subsea Network). Combining the two companies will allow VSNL to cut costs at Teleglobe, by running its traffic over the Tyco infrastructure wherever possible.

Thirdly, VSNL gets its hands on the VOIP wholesale business formerly known as ITXC, which Teleglobe finally snared in June 2004, having announced the deal initially in November 2003. Teleglobe has since been working on integrating the capabilities of the two networks (see Teleglobe Unifies TDM and VOIP and TeleGlobe Gobbles Up ITXC).

TeleGeography Inc. analyst Jason Kowal reckons VSNL has picked up Teleglobe at "a pretty reasonable price." Teleglobe may have had its problems in the past, but Kowal says it's still a major player in the voice wholesale market, competing with global big guns such as AT&T and MCI.

Also, Kowal notes that ITXC, with about 5 billion VOIP minutes in 2004, is still the number one VOIP wholesaler, just ahead of iBasis Inc. (OTC: IBAS), and that Teleglobe has global network assets that are probably unrivaled. These should fit well with the monster transpacific capacity VSNL acquired with the Tyco network.

While VSNL may be getting loss-making Teleglobe for a reasonable price, it still offered a premium above the international carrier's recent valuation (see Teleglobe Reports Q1 Loss and Teleglobe Reports Q4, Full Year).

That may have been because it had competition. A Teleglobe spokeswoman says the Indian operator was just one of a group of companies that had "expressed an interest" in Teleglobe, and that VSNL's offer was selected as the preferred suitor because it offered the "best deal for our shareholders."

And VSNL is hungry for international business and success. While company representatives were unavailable for comment (due to time differences), board director N. Srinath stated in the company's press release that VSNL wants to break into new markets and that it aspires "to become a leading global player in wholesale voice and bandwidth and enterprise data services.” The Teleglobe acquisition will help VSNL achieve such goals, he stated.

It also puts VSNL one step ahead of its domestic rival Reliance Infocomm Ltd., which also entered the subsea market recently by buying FLAG Telecom Group Ltd. (see FLAG Amalgamates With Reliance).

Teleglobe offers service in 240 countries, owns or leases capacity in 80 subsea cables, and has more than 200 direct and bilateral interconnect agreements with fixed and wireless operators around the world, including in growth markets such as Russia (see ITXC Is Russian Around). It has 1,400 wholesale customers and carries 13 billion minutes of TDM and IP telephony voice traffic a year, while VSNL handles 3 billion minutes.

The acquisition requires clearance by Teleglobe's shareholders and by multiple regulators, and will likely take between six and eight months to complete.

— Ray Le Maistre, International News Editor, Light Reading