A Passage to India for Tyco Global?

Potential U.S. bidders turned up their noses at the conglomerate's telecom unit, but not the subcontinent's Tata and Reliance

By Steve Rosenbush

Tyco's auction of its global underseas- and transcontinental-cable network appears to have attracted two major bidders, BusinessWeek Online has learned. They are two Indian telecom companies -- Tata Group's VSNL unit and Reliance Infocomm. A final deal between Tyco (TYC ) and one of the bidders could come as early as September, according to sources with knowledge of the matter.

Once valued at $3.5 billion, the Tyco Global Network is expected to fetch around $200 million, those sources tell BusinessWeek Online. Several venture-capital firms, including Phoenix-based Pivotal Private Equity, initially had expressed strong interest, but that appears to have waned because of differences over price. Singapore Technologies, which had also kicked the tires, has its hands full with its earlier acquisition of troubled telecom Global Crossing.

Privately held conglomerate Tata had been considered the leading contender. It's in the midst of reshaping its VSNL unit, which long had a monopoly on collecting international calls coming into the Indian market. The business is sound, but slow-growing. With the addition of Tyco's networks, Tata would be able to connect its domestic long-distance networks to important overseas markets in Asia, North America, and Europe. That would allow it to compete for more of its customers' business, which is now split between Tata and its rivals.


  Tata faces a strong challenge from Reliance, which might find the network an even better fit. Having acquired the assets of bankrupt Flag Telecom last year, Reliance already has a major presence in the international calls market. Tyco Global Network would complement Flag because it has a Pacific cable, which Flag lacks.

The Flag acquisition suggests that Reliance's business model is based on owning its own telecom networks, while VSNL has focused on being a services business, according to Stephan Beckert, director of research at Primetrica's TeleGeography unit.

Exiting gracefully from the telecom market will be a challenge for Tyco CEO Ed Breen. In the late '90s, intense competition in the long-haul telecom market pushed call prices down to bargain-basement levels. The growth in traffic wasn't enough to offset the falling prices, and players such as Tyco and Global Crossing saw their revenues -- and value -- plunge.

The business' economics haven't improved much, which has bidders in a grumpy mood. Goldman Sachs (GS ), which is running the auction, will likely have a tough time obtaining a premium price for Tyco Global Network. One person familiar with the matter says Morgan Stanley (MWD ) was originally invited to run the auction but declined because it feared commissions from the sale wouldn't be worth the effort. Morgan Stanley couldn't be reached for comment.


  Big North American telecom players are conspicuously absent from the auction, being all too familiar with the difficulties of making such a business work. "The main issue is the operating expense, which is very, very high," Beckart says. The new owner of Tyco's global network could conceivably lose money even if it acquired the asset for free, because the maintenance and capital expenses are huge -- and prices are still falling.

Still, the network could prove attractive. It offers strategic value for a player such as Reliance or Tata, as it would help provide customers around the world with a variety of new products. And if price declines slow or stabilize, the economics of the business could improve dramatically.

Prices in some international markets already are reversing, Beckart says. If rates in the undersea telecom market pick up, Tyco's Global Network could be worth far more than it is today. And potential bidders who lost interest could end up regretting their decision.

Rosenbush is a senior writer for BusinessWeek Online in New York

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