The Telegraph
Since 1st March, 1999
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Reliance Flags off telecom coup
- Network boost for phone major

Mumbai, Oct. 16: Reliance Industries will buy Flag Telecom Group in a $207-million (Rs 1000 crore) deal that will make it a bandwidth giant like VSNL and Bharti.

Reliance Gateway, a subsidiary of Reliance Infocomm, will acquire 100 per cent of the overseas firm’s fully diluted equity in a way that values each share at $95.61, a premium of 50 per cent on Flag’s current market price.

The buyout is a big shot in the arm for the Ambanis, who have presided over Reliance Infocomm’s blistering growth in subscribers to five million.

The size of the deal was matched only by the dramatic manner in which it was told. It came just after Reliance vice-chairman and managing director Anil Ambani had finished dishing out a second-quarter scorecard that came out better than expectations.

As he explained what lay behind the rosy numbers, he was frequently interrupted with scraps of paper passed by senior officials.

Moments after he had fielded posers from the media, he excused himself, saying he would be back soon to make a key announcement. He returned with news of the industry-defining deal, and left a trail of gasping reporters.

Flag will make Reliance what VSNL and Bharti are: an infrastructure provider for overseas telephony in India.

“This agreement is an important first step towards concluding the acquisition of Flag, which is subject to certain conditions, including the receipt of regulatory approvals and the approval of Flag’s shareholders,” Ambani said.

The Rs 1000 crore that will be required to buy the company will come entirely from internal accruals.

The shareholders of Flag, which provides bandwidth through its undersea cable network, are expected to meet in December to clear the block-buster deal.

“We believe this premium offer by Reliance to acquire Flag represents a strong endorsement of our operating strategy and is in the best interests of our shareholders. Reliance is already a key customer of Flag, and one of the most extensive in the world today,” Flag Telecom co-chairman and CEO Patrick Gallagher said.

A struggling telecom network operator based in London, Flag was trying to cope with its financial troubles, and had long been on the look-out for a buyer. It owns and operates over 50,000 kms of undersea fibre optic cable that spans four continents and connects key regions of Asia, Europe, West Asia and the US.

The company counts 180 leading operators among its customers, including the top 10 international carriers. Its buyout will help Reliance Infocomm offer a variety of telecom products and services to customers, mainly the big telecom carriers, internet service providers and other bandwidth-intensive users like broadcasters.

The acquisition, once through, will be the first international acquisition by Reliance; it will also be the biggest overseas buyout in the services sector by an Indian firm.

Flag’s global fibre-optic network will complement Reliance’s own next-generation digital network in India and enable the company to cater to customers world wide more effectively by facilitating end-to-end solutions.

Davis Polk & Wardwell advised the Ambanis on the legal aspects and Deutsche Bank on financial matters of the deal.

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