It is down to the wire for the Tata group to decide if it wants to fork out at least Rs3,657 crore and buy out the government’s 26.12% stake in the country’s largest long-distance telecom company, Videsh Sanchar Nigam Ltd.
The group has until 12 February to exercise its right, granted five years ago, to buy the stake from the government. While the actual price will be decided by an independent evaluator, it won’t come cheap, given the recent run-up of VSNL shares.
Over the past one and a half months, VSNL shares have risen 28% to close at Rs488.50 on Bombay Stock Exchange. During the same period, the exchange’s benchmark index, Sensex, has risen 11.4% .
“The company will take a decision over the weekend,” said Kishor A. Chaukar, managing director of Tata Industries and a director on the VSNL board. Ishaat Hussain, director, finance, Tata Finance, and also a director on the VSNL board, also said no decision has yet been taken.
Also complicating matters is a large piece of land—773 acres—that VSNL currently owns and whose value runs into hundreds of crores of rupees. The government is expected to take a decision on the issue after the Tata group finalizes its decision.
Despite being in the throes of completing India’s largest single acquisition—that of steel giant Corus Plc., it is unlikely the Tata group will want to pass up on the chance to consolidate its hold over a key player in the country’s booming telecom sector.
Indeed, way back in 2002, Ratan Tata, chairman of the group, expressed his desire to combine VSNL with Tata Teleservices, the telecom unit of the group, saying: “In fact, one day, the two may merge into one company.That is our eventual desire.”
Analysts see enormous value for the Tata group in any merger of VSNL with Tata Teleservices, especially because VSNL is fast emerging as an international player following two major acqusitions. In 2005, it acquired the submarine cable assets of Tyco Global Network for $130 million, getting 60,000km of transcontinental undersea cable bandwidth. Last year, it acquired Teleglobe, which is a major player in wholesale voice.
A VSNL spokesperson declined to comment saying, “only the Tata group can say whether it is buying the government stake or not.”
Tata group acquired the government’s 25% stake in VSNL on 13 February 2002, when the telecom major’s shares were trading around Rs175. Subsequently, the Tatas made an open offer for another 20% of VSNL. The 45% VSNL stake cost the company Rs2,591 crore and it now holds a 50.11% stake in the company. Some 40.7% is owned by the Tata group through a special purpose vehicle called Panatone Finvest, 8.51% through Tata Sons, the holding company of the group, and 0.9% through Tata Power, another group company.
The original purchase gave the group a call option, allowing it the right to buy the goverment’s remaining stake. That deadline expires next week.
VSNL’s market capitalization on Tuesday stood at Rs13,999.25 crore. At current market price, the government’s stake would cost the Tatas Rs3,656.6 crore. Both both parties had previously agreed that if the Tatas decide to buy the stake, the price formula will be worked out by an independent valuer.
Even if the Tatas buy out the government’s stake, it will retain one nominee on the board until the issue of VSNL’s massive land holdings are sorted out.
The Tatas bought the company minus its land and the shareholders’ agreement spoke about carving out the land from VSNL and setting up of another company. A company called Hemisphere Properties was later set up but the land hasn’t been transferred as yet.
In addition to the Tata share purchase possibility, some of the rise in VSNL’s shares is on the “possibility of the long-standing road block on the land issue getting expedited,” said R. Amarnath, executive director, Centrum Capital, a Mumbai-based investment bank .