|IPCL's olefin plant at Vadodara, Gujarat:
Value waiting to be unlocked
at it whichever way you want. The three chapters in this disinvestment
story couldn't be more unrelated. First of all, look at their businesses:
one is into international long distance telephony; another pumps
out petrochemicals, and the third bashes (ok, non-ferrous) metal-zinc,
to be precise. Then, look at the price at which they went: IPCL
fetched the highest at Rs 1,491 crore, vsnl a close Rs 1,439 crore;
and Hindustan Zinc, a relatively modest Rs 445 crore. Finally, consider
the challenges each of the new owners faces: The Tatas, despite
their face-off with the Communications Ministry, must figure out
ways of making the acquisition viable; the Ambanis of Reliance have
probably got themselves a nice deal in IPCL, but there's historic
baggage (read: expensive overheads) that they need to get rid of
and then invest in expanding capacity. Anil Agarwal of Sterlite,
which also acquired Bharat Aluminium Company, must drub Hindustan
Zinc back into shape.
In each case, the buyers may have paid for
the speculators too. vsnl's stock price is down to Rs 103 from Rs
179 in mid-February; IPCL has taken a bigger hit, falling from Rs
154 in June, when the deal was struck, to Rs 60 now; and HZL has
halved in market price to Rs 16 over the last six months.
The question, then, that the new owners-and
the other investors-must answer is this: can the latent value in
these three companies be unlocked to take the stock prices to a
new high, or will the acquisitions prove an expensive (even bitter)
lesson in M&A? A big part of the answer lies in two things:
One, the industry environment-including things like prices and regulations-and,
two, the strategic plans of the new owners. Let's start with VSNL.
| A TALE OF THREE PSUS
In each case, there are pitfalls to negotiate.
| Why It Makes Sense
VSNL: With its ILD dominance
and DLD licence, VSNL fits in well with the Tata group's strategy
of becoming an integrated telecom player.
IPCL: IPCL and RIL have
a near monopoly of potentially one of the largest markets in
the world. Per capital consumption of polymers in India is one-sixth
of the world average.
HZL: The zinc-led producer
fits in well with the copper business of Sterlite and the aluminium
business of Balco, acquired earlier by Sterlite.
What The Owners Plan
VSNL: Gaining consumer
access through tie-ups with local access providers starting
with Tata companies. May have to undertake direct marketing
to build relations with consumers.
IPCL: Growth through geographical
expansion, market consolidation, product extensions, acquisitions,
and greenfield investments. Investment in infrastructure and
water also planned.
HZL: Increase capacity
and productivity of the workforce. Apparently, productivity
is set to touch an all-time high this financial year.
What The Issues Are
VSNL: Needs to hammer
out a favourable interconnect agreement with BSNL and MTNL,
which could be crucial to its long-term competitiveness. Needs
to roll out DLD quickly.
IPCL: Needs to cut overhead
costs, reduce manpower, and interest costs to become more
competitive. May also need to increase capacity of polyethylene
HZL: Industrialised nations
are increasingly opting for aluminium and plastics over zinc.
The trend may come to India, although it may take several
The Morning After
One of the things that the Tatas are unhappy
with in the VSNL deal is the compensation package given by the government
to the TELCO for dismantling its monopoly in April this year, two
years ahead of schedule. The package includes a licence to provide
domestic long distance (DLD) telephony, but none for fixed line
or mobile telephony. Union Communications Minister Pramod Mahajan
maintains that the package was accepted by the old management and
the new one knew about it before bidding for the company.
One could forgive the Tatas for feeling miffed.
After all, VSNL is under pressure. While the global long distance
traffic has remained flat over the last few years, new players like
Bharti Telesonic and Data Access have launched their ILD operations
and are also biting at VSNL's heels. There is pressure on its margins
due to a 40 per cent fall in tariffs triggered by the new entrants.
It is engaged in a bitter haggling with Bharat Sanchar Nigam Ltd
and Mahanagar Telephone Nigam Ltd over revenue-sharing on international
calls. The two PSUs own practically all of the fixed-line telephone
subscribers in the country and are, therefore, the largest customers
of VSNL-a fact they are exploiting to the hilt.
Still, the Tata top brass appears sanguine,
claiming that VSNL need not lower its tariff further. Their argument
is that neither of the competitors has the capacity to carry any
significant chunk of India's ILD traffic (2.5 billion minutes of
incoming and 0.7 billion minutes of outgoing per year, as of March
2002). Customers will, therefore, not be able to connect through
the competing networks and will go back to VSNL.
Bharti Telesonic's CEO N. Arjun disagrees.
"As the traffic grows, we can easily buy additional capacities,"
he claims. Besides, Bharti doesn't need to replicate VSNL's infrastructure.
It has entered into bilateral agreements with foreign carriers focusing
on 10 countries that account for 80 per cent of the traffic. Siddharth
Ray of Data Access claims to have cornered between 20 and 25 per
cent of the country's ILD traffic, outbound plus incoming.
|BT 500 RANK
AVG. MKT. CAP
For H1 2002-03 in Rs crore
|VSNL's tussle with BSNL and MTNL,
and new ILD competitors may be worrying some investors. But
there's little doubt that the erstwhile PSU fits in well with
the Tata's overall telecom gameplan.
The thing in favour of VSNL is that Bharti and
Data Access have been tapping only a small amount of the outbound
traffic originated by private basic and cellular operators. With
BSNL and MTNL, VSNL enjoys a preferred carrier status for the next
two years. But it will be hard-pressed to charge a premium. In DLD,
for instance, the bigger BSNL was forced to undercut Bharti, even
though Bharti was confined to the cellular-to-cellular traffic,
a meagre 7 per cent of the market.
What this means is that VSNL needs to do something
fast. "There are huge uncertainties over the core business
of VSNL," says Manish Srivastava, an ABN Amro analyst. "Investors,
especially those in the secondary market, are not comfortable with
the uncertainty," he says.
The Tata think-tank is aware of the need. Says
a group executive: "VSNL has to fit into the context of the
group's overall telecom strategy, which is an integrated one starting
with international traffic to the last mile access to the consumer,
retail as well as corporate." The strategy envisages group
company Tata Teleservices, the basic and limited mobility operator
in six circles, including Delhi and Mumbai, and Idea Cellular (in
which the Tata group is one of three investors) as access providers,
and VSNL providing the long distance transport, international and
The Tatas, however, have not yet rolled out
VSNL's DLD service. "If I had acquired VSNL, I would have launched
the DLD service the next day," says a rival. And the bid to
get consumer access by investing Rs 1,200 crore out of VSNL's reserves
in the equity of Tata Teleservices has been stalled thanks to the
intervention of the communications minister. The issue is now before
a review committee.
|BT 500 RANK
AVG. MKT. CAP
For H1 2002-03 in Rs crore
|IPCL's PSU past means the company
is burdened with inefficiencies of all kinds. Not surprisingly,
the new management is focussing on productivity improvements.
Besides, the new status of VSNL as a private
sector company has its erstwhile siblings looking upon it as just
another rival. It doesn't help that MTNL is a rival to Tata Teleservices
in Mumbai and the two will soon compete in Delhi. The other four
operations of TTL happen to be the most lucrative operations of
BSNL. DLD happens to be BSNL's cash cow. Thus, VSNL's bid to get
consumer access and enter DLD takes it head on against its two biggest
However, the Tatas' immediate concern would
be to thrash out an interconnect agreement with BSNL and MTNL, which
have leveraged their dominance in the access business to work out
a very lucrative arrangement with Bharti and Data Access. The PSUs
now want similar terms from VSNL. They seem to hold the most potent
cards in the game since VSNL's preferred carrier status can be scrapped
if it doesn't offer 'market prices'. Mahajan has been saying that
the PSUs will be happy to join hands with Bharti and Data Access
if VSNL did not match their rates.
All said and done, VSNL may not be a bad buy
for the Tatas. They paid close to Rs 2,500 crore for a 45 per cent
stake in it. VSNL earns over Rs 7,000 crore in revenues, has about
Rs 2,000 crore worth of cash on its books, its 5.4 per cent equity
in Intelsat is valued at close to Rs 1,200 crore, and it has a healthy
revenue stream in leased circuits business. Plus, there are its
internet service business, real estate, other infrastructure, and
incumbent strengths. "Even the worst case scenario for VSNL
will not be as bad as it is being made out to be. It can make a
decent amount of money even if it accepts BSNL's terms," says
Srivastava of ABN Amro.
Strength In Size
There is no such confusion over the wisdom
behind Reliance's acquisition of IPCL. It happens to be India's
second-largest petrochemicals company and fits well with the oil
business of Reliance and the two together have a near monopoly of
the sector. The two together rank 11th in the list of world's largest
polymer producers. And since they service the same customers, both
in domestic as well as overseas markets, a detailed programme is
underway for integrating their operations at marketing offices and
| HINDUSTAN ZINC: BROWN GOLD?
| In the midst of
big-ticket divestments of VSNL and IPCL, little attention has
been paid to Sterlite Industries' acquisition in April this
year of Hindustan Zinc Ltd, one of India's leading zinc products
manufacturers. Having acquired 26 per cent of the government's
equity and another 20 per cent through an open offer, Sterlite
has been busy cutting costs and improving productivity with
a vengeance. HZL is projected to end this financial year with
a 20 per cent increase in production to 205,000 tonnes.
Next on the cards is a two-fold increase in capacity through
a combination of brownfield expansion and debottlenecking.
Plans are afoot to up the production at five lead-zinc mines
operated by HZL. Zinc consumption in industrialised countries
is stagnating due to its increasing replacement by aluminium
and plastics. But lesser developed countries are still growing
consumers of zinc. In any case, since India is a net importer
of zinc, all of HZL's production finds a market within the
Investors, however, would be paying extra attention to HZL.
Bharat Aluminium Company (BALCO), an unlisted company in which
Sterlite acquired 51 per cent equity in March 2001 (the government
holds the rest), reported a dismal performance in its first
full year (2001-02) under Sterlite. Its net profit plumetted
to Rs 87 lakh from Rs 55.72 crore in the year before. Sterlite
cited a 67-day strike and a steep increase in power costs
due to prolonged shutdown of one of Balco's four captive power
plants as the reasons. The investors would be hoping no such
thing happens with HZL.
Not that there aren't issues to be tackled at
IPCL. Its PSU past means it is burdened with inefficiencies and
high costs of all kinds. Says Miten Lathia of SSKI: "IPCL has
the high cost structure typical of a PSU. One would look forward
to improvements on that front." Not much has come from the
company officially on the future plans, except that feedstock integration
between the two companies, particularly in naphtha, has already
been achieved, resulting in lower costs to IPCL. Reports, however,
suggest that Reliance is already busy, albeit quietly, addressing
the other issues.
One of the first things it is said to have
done after acquiring a 46 per cent stake in IPCL at Rs 231 a share
is to put a proposal to the government to pre-pay a $100-million
loan. Refinancing of an overseas commercial borrowing is also planned.
The idea: halve IPCL's interest costs to the levels of Reliance.
"IPCL can now raise funds at 6.5-7 per cent, the rate that
applies to Reliance," says Satyam Aggarwal of Motilal Oswal.
However, there are no immediate plans of a
merger. "The current focus of the company is to make it debt-free
and enhance its capital productivity," new Chairman Mukesh
Ambani said at the company's AGM in Vadodara on September 28. "By
March 2003," he added, "IPCL (would be) on the rebound
and be recognised as the most successful example of the disinvestment
programme of the Government of India." Investors-not just of
IPCL-will be watching.