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VSNL: To accept or not?

Apr 9, 2002

Videsh Sanchar Nigam Limited (VSNL), the once monopoly in the international long distance telephony segment, was acquired by the Tata’s in the last fiscal. Tata’s acquired a 25% stake in VSNL at Rs 202 per share for a consideration of Rs 1.4 bn. The moot point from a retail investor’s perspective is whether to accept the open offer by the Tata’s, which is expected soon. Read more on VSNL’s disinvestment and its strategic fit into the Tata Group

On the one hand, the company faces increasing risk of slower growth in profits in the future in light of increased competition in the ILD segment with the opening up of the segment with effect from April 1st, 2002. Post April, both Bharat Sanchar Nigam Limited (BSNL) and private ILD operators like Bharti have cut ILD rates by more than 50% in an effort to lure customers. This is likely to result in the revenue agreement with VSNL being revised lower. Though paid-minute calls are expected to rise at 20% per annum, value growth is unlikely. This could pressurise operating margins of the company. The Telecom Regulatory Authority of India (TRAI) has also allowed Internet Service Providers (ISPs) to offer Internet telephony (Read more on Internet telephony).

Apart from its strategic fit with the Tata Group, much has been talked about VSNL’s overseas investment and its real estate. The company has around 5% stake in Intelsat, which is expected to go public before December 2002. This would unlock value in its investments. VSNL’s investments range from satellites to undersea cable networks like SEA-ME-WE. Intelsat reportedly has a net profit of around US$ 505 m. Just assuming a 5% share of profits works out close to Rs 1.3 bn (7% of FY01 net profit). But the estimated value of Intelsat is much higher at around US$ 10 bn. Despite being a PSU, the management had invested in various promising ventures in the past, which augurs well in the long run.

Besides, on disinvestment, VSNL de-merged some of its properties into a separate company. Reportedly, on acceptance of the open offer, the existing shareholders might be compensated for through issue of shares proportionately in the property company. But clarity is awaited on this front. Also, as to whether the shares would be issued for all shareholders or for those who opt for the open offer is not yet known.

Given this backdrop, it is yet unclear as to how the Tata’s intend to utilise VSNL’s resources in the future. Keeping in mind the subdued growth prospects of its core business i.e. ILD (85% of revenues in FY01), combined with increased competition and falling tariffs, the risk profile of the company has increased significantly. Its venture into DLD, though promising, is still at its early stage. Therefore, from a retail investor’s perspective, keeping the risk profile of the company in mind, one might consider opting for the open offer from the Tata’s. Post disinvestment, Tata’s have a 25% stake, the Indian government has 28% and the remaining 45% is free float. Of the 45%, in FY01, mutual funds and ADRs & FIIs had 7% and 37% stake in the company respectively. With Tata’s set to make a 20% open offer, not all shares would be accepted. Given the fact that the offer price is at an 8% premium to the current market price, it would be wise for a retail investor to participate in the open offer.

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