It's a big-ticket deal that will net the government Rs 3,000 crore, rekindle interest in telecom, and infuse dynamism into VSNL.

By Bharat Ahluwalia

It's a whopper of a sale. The single largest divestment to date. And when it does come through, it could net the government anywhere between Rs 2,500 crore and Rs 3,000 crore. Yup, you read the zeros right. That's what the government could get by selling 25 per cent of Videsh Sanchar Nigam Ltd. (VSNL) to a strategic investor.

And when the deal does go through, Yashwant Sinha owes a big thank you to the PMO. For, if the Department of Telecom (DoT) had its way, bringing in a strategic partner for the Rs 7,230 crore corporation would have remained a pipe dream. What the dot wanted was a mere four per cent sale-in favour of the employees-of the government's 52.97 per cent stake in the company. That's because a 49 per cent government stake, would give total control of the company to the dot and remove Parliamentary and Comptroller and Auditor General supervision. And till mid-February, it appeared that that was what was going to happen.

But the PMO slammed the door shut on dot's face last month and announced the 25 per cent strategic sale. By the time you read this, the government would have also selected the lead manager-most expect it to be Salomon Smith Barney, which managed VSNL's GDR, followed by its NYSE listing last August. By April 10, 2001, potential bidders must put in their expression of interest. And after the sale, the strategic partner is to pick up a further 20 per cent stake from the market, giving it a total 45 per cent ownership of VSNL. ''Anyone who wants to buy VSNL should be prepared to spend between Rs 5,000 crore and Rs 6,000 crore,'' says a member of one of the consortia that intends bidding for VSNL.

Barring a sulking dot, all this is good news for everyone including the government. ''Nobody would mind paying around $600 million (Rs 2,730 crore) for a 25 per cent stake in VSNL,'' says Yashwant Kini, an analyst at sg Securities. That's an approximate figure derived by taking 25 per cent of VSNL's market capitalisation (which oscillates between Rs 9,000 crore and Rs 10,000 crore) and adding a 25 per cent premium for the controlling stake given to the strategic partner. In addition, VSNL's new owner would need to shell out another Rs 2,000-odd crore to pick up the 20 per cent from the market.

The Key Players

Despite the huge monies involved, VSNL's sale is expected to attract many bidders. While some have already made noises to that effect-BPL Innovision and Bharti Telecom for instance-others like British Telecom, AT&T, the Tata group, and Reliance, are also expected to throw their hat into the ring. ''There will be many interesting consortia being formed,'' says one suitor. ''Indian telecom companies combining with both financial- and (foreign) telecom-partners.''

But everyone's bets are on Reliance. For one, barring the Tata group, it'll probably be the only Indian bidder, which on its own meets the minimum net worth criteria of Rs 2,500 crore set by the government. More important, VSNL fits perfectly into its plans. It's well known that Reliance is setting up a fibre optic network across the country. That'll give it the ability to provide internet bandwidth and long-distance telephony domestically. What it needs is a connection to the outside world. And VSNL as the monopoly provider of international phone services in India, has the landing stations and international connectivity through cables. Plus, it also has a reasonable domestic infrastructure for the internet and long-distance telephony. While VSNL would be an asset in anyone's portfolio, it's essential to Reliance's business plan.

The one to benefit the most from this sale, though, will be VSNL itself. It's sitting on huge assets (which is what interests the bidders in the first place): reserves of Rs 5,182 crore, one GBPs of bandwidth already in place, 37 earth stations, switching capacity in nine cities, 5.5 lakh internet subscribers in six cities...the list could go on. And yet, it derives roughly 87 per cent of its revenues from international telephony. which is one stream of revenue that is definitely going to get hit post-2002, when its monopoly on international phone services goes. ''I wonder how much our revenue will drop after our monopoly is removed,'' says Vinoo Goyal, Director (Development), VSNL. ''Plus, our margins will certainly come under pressure. What we need is a dynamic private sector management team that will help us diversify into new areas.''

For its part, VSNL either hasn't done much to expand its areas of operation-though it has finally applied for eight basic phone licences-or has been hamstrung by government procedures. ''We introduced the concept of the National Internet Backbone, way back in 1992, and even sold it to investors,'' says a VSNL source. ''But the project was killed by the government at the behest of private companies. VSNL had the potential to be three times the size it is today.'' Even today, telecom experts believe that VSNL is uniquely positioned to offer domestic long-distance services, but typical of government enterprises, hasn't done so.

This disinvestment offers hope for everyone: the government can actually walk its talk on disinvestment, it'll rekindle interest among disenchanted investors in India's telecom sector, and allow VSNL to perform to its potential.

Or maybe we are just living in dreamland? Look at Balco.

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