A Jolly Good Bargain

Recently, Flag CEO, Patrick Gallagher, told his employees that the London-based global network
operator would be bought by Reliance Gateway Net Private Ltd, a wholly-owned subsidiary of Reliance Infocomm Ltd, for $207 million, subject to shareholders’ approval. Already approved by its board, Flag is planning to get the shareholders’ approval this December, followed by regulatory approvals.

The India Scenario

Acquiring Flag fits into the Reliance scheme of things in ways more than one. First, it helps the company to complete its portfolio in the integrated space by strengthening its international long distance services, a weak link in the company. Presently, in ILD, Reliance is active only on the voice front and is also placed at the bottom of the table. The acquisition of Flag will help the company to provide both voice and data service in all geographies and will also increase its market share in the ILD space. Second, Reliance is actively focusing on broadband by providing 100 Mbps Ethernet links to desktops and devices in half a million buildings in the first phase and around 10 million buildings in the next. The acquisition fits into Reliance’s game plan as they do have a domestic backbone but are lacking on the international front, according to Siddhartha Ray, managing director, Data Access.

Third, the acquisition will help Reliance to leverage on Flag’s existing relationship with international carriers giving a big push to the India operations. With Bharti’s i2i cable network to face competition from Reliance, another round of price wars in the ILD space might be in the
offing, this time working to Reliance’s advantage, as Flag owns cables not only in Asia but also in Europe and America. But the question is how will Reliance Infocomm use Flag’s India bandwidth and whether it is justified in having another landing station? With VSNL having Flag’s exclusive landing rights in India since 1997, this looks very difficult until a compromise formula is worked out with Tata. Only later can Reliance look at capacity expansion.

The International Front

On the international front, Flag is a leading independent global transport and network services provider with revenues of $199 million in the year 2002, and an installed base of around 180 operators. The company has been targeting telecom carriers, ISPs, ASPs, content providers and broadband by offering services like managed bandwidth, flexible bandwidth, co-location, and IP (Global IP Transit Service, V-NAP service, Global Ethernet service). All this will help Reliance Infocomm to get into the same league as Cable & Wireless, Global Crossing, WorldCom, and Level 3, right from day one.

With an increased scale of operation, Reliance Infocomm will be able to address the entire globe leaving its
competitors–VSNL, Data Access and Bharti Infotel far behind.

Flag has footprints in Asia, Europe, and America through the Europe-Asia, Atlantic-1 and North Asian loops. Flag Europe-Asia is the world’s longest privately funded undersea-cable system stretching from the UK to Japan. Operational in 1997, it has an aggregate capacity of 10 Gbps and is currently being upgraded to a maximum of 80 Gbps. Flag Atlantic-1 is the transoceanic cable system with a combined design capacity of 4.8 Tbps, providing a fully protected city-to-city service between London, Paris, and New York. Flag North Asian loop that provides intra regional, city-to-city connectivity between Hong Kong, Seoul, Tokyo and Taipei, can support the strong growth in intra Asia Internet traffic. Operational in 2002, it’s capacity of 320 Gbps is upgradeable to 3.8 Tbps. All this will give Reliance the reach as well as flexibility to route its traffic at a cheaper price and also enhance network resilience.

On the value-added services front, Flag also owns and operates a low latency global MPLS-based IP network having 25 point-of-presence (POPs) in 14 countries, which connects most of the world’s principal international Internet exchanges, thereby enhancing bandwidth and providing flexibility. In the end, Reliance has been able get a good bargain. Now it remains to be seen how fast restructuring takes place, so as to move to the second phase of Infocomm’s plan.

Pravin Prashant in New Delhi