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Sterling pulls out of race for VSNL

Sterling Ltd, one of the three suitors for state-run telecoms giant Videsh Sanchar Nigam Ltd, said it had pulled out of the privatisation race, less than two hours before the deadline for putting in price bids.

"We've just now decided that we won't be participating in the financial bid on Friday. We're disappointed that we've lost a very good opportunity," V Srinivasan, chief operating officer of Dishnet-DSL, a key company of the unlisted group, told Reuters.

Sterling's partners in the bidding for Videsh Sanchar Nigam Ltd, a monopoly overseas telephony provider and one of India's largest Internet access providers, were two US-based firms, TyCom Ltd and Century Tel.

Srinivasan said Sterling had asked the government for more time, until the middle of March, to enable it to finalise shareholding and share purchase agreements with the US partners, but the request was turned down.

Two of India's largest conglomerates, the Reliance and Tata groups, now remain in the race for the New York Stock Exchange-listed VSNL, whose privatisation is billed as the nation's most ambitious selloff in a decade of economic reforms.

The government is selling a 25 per cent stake in the company along with management control to a private strategic partner in a bid to bring down its holding to 26 per cent from 52.97 per cent now. It plans to sell another 1.97 per cent to VSNL's employees.

Analysts say the government is certain to reap far less than it would have got a year earlier when it first announced plans to sell a 25 per cent stake -- along with management control -- in Videsh Sanchar Nigam Ltd.

On April 1 it will lose its monopoly on overseas calls, which now generate 90 per cent of its revenue. The cost of phoning overseas from India, now among the highest in the world, is expected to plunge with the introduction of unlimited competition.

"The risks attached to the company are very high. There's very poor visibility with regards to its financials say even a year from now," said an analyst with a European brokerage, who asked not to be identified.

Last week Crisil Advisory Services and PA Consulting Group issued a research report predicting that VSNL's share of India's international telecom market will plunge by as much as half over the next three to four year.

Repeated delays in its privatisation, originally slated to be completed last August, and the setting of easier entry norms for private players to compete with VSNL, have caused the value of the New York Stock Exchange-listed VSNL to tumble.

At Thursday's closing price of Rs 158.15 on the Bombay exchange, a 25 per cent stake is worth $232 million -- a half to a third of what analysts valued the stake at a year ago.

"I would still put a liquidation valuation of Rs 200 a share," said an analyst at a Mumbai-based brokerage.

At that price, the entire company would be worth $1.17 billion -- and the 25 per cent stake on offer about $293 million.

CROWN JEWEL, FEW TAKERS

Until recently the company was touted as one of the government's crown jewels because it was profitable, debt-free and had Rs 50 billion in cash.

In recent months, VSNL has paid out Rs 125 in special dividends to shareholders to reduce that huge cash hoard ahead of its privatisation. About Rs 15 billion in cash remains.

VSNL also has only 3,000 employees, setting it apart from other overstaffed state-run companies.

Despite all this, of the six groups which put in preliminary bids last April, only two remain.

Three others -- Birla and Videocon groups and a consortium comprising telecoms group Bharti Enterprises and Singapore Telecom -- pulled out.

RELIANCE ACTIONS A MYSTERY

Now there are doubts whether the remaining contenders will put in bids.

Partly that is because on Wednesday, India's telecoms minister announced VSNL would no longer have an exclusive arrangement with FLAG Telecom to market international bandwidth.

Doubts over whether the Reliance group, India's largest private conglomerate, will bid have arisen since it decided this week to sign a national long distance telephone service licence agreement with the government.

Reliance would need to pay Rs 1 billion in entry fees and Rs 4 billion as bank guarantees to acquire an NLD (national long distance) licence.

Reliance previously had been considered a hot favourite to buy the VSNL stake in part because VSNL has promised a free licence to enter the long distance business as compensation for ending its international phone service monopoly two years ahead of schedule.

"Reliance has made a statement by going ahead and signing its NLD licence," the analyst at a Mumbai-based brokerage said.

Now analysts consider the top suitor to be the Tata group, one of India's oldest and respected industrial groups whose businesses run from making salt to automobiles to software.

"On the face of it, the Tatas have the most compelling reason. They don't have a NLD licence, no major Internet business, no major telecom infrastructure. VSNL for them would be a good fit," the Mumbai analyst said.

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