M&A Journal: Reliance’s IPO Plans for FLAG

January 23rd, 2012 by · 4 Comments

Late last week, Bloomberg carried a rumor suggesting that Reliance Communications is floating a plan to sell a stake in its FLAG unit. The idea, apparently, is to sell as much as 75% of its submarine cable division in an IPO in Singapore.  While I think the rumor has legs, I am skeptical that they will come anywhere near the $2B valuation they are looking for.

If you’ll remember back a year or two, Reliance has been trying to sell off all or part of its Globalcom division for some time. The price two winters ago was said to be $3B, which included the Yipes and Vanco assets.  At such price levels they didn’t find any buyers.  This new foray would put a $2B valuation on just the submarine portion (apparently), which doesn’t sound like the company has had a change of heart on valuation.

Reliance is also said to be selling its tower assets, and it is clear that they are looking to raise cash aimed at paying down some debt. But it is private equity that is paying a premium for fiber assets right now, while even strategic buyers are cautious. The public markets don’t like fiber much at all in comparison, so it’s hard to see why Reliance would get a better price taking that route than any inadequate offers they might have gotten elsewhere.  Maybe things are different in Singapore?

We don’t really have any current information on FLAG’s current financial situation. Reliance bought FLAG back in 2003 for $209M, then Yipes for $300M in 2007, and Vanco for $77M in 2008. My impression is that Reliance’s cash crunch has made it difficult for the Globalcom division to invest at the levels it may have wanted to, which means that growth is probably modest at best.  Fierce Telecom quotes an analyst suggesting $1B is a more likely valuation, which I find more likely although I might be a tad more generous.

There is the possibility that, like two years ago, the company is floating the possibility to shake loose any potential buyers that might be ready for a second look.  For instance, NTT has done so much with PC-1 since buying it to power the growth of their global backbone that they might see greater opportunity in FLAG that they didn’t before.

And then there might be some new buyers out there. For instance, now that Level 3 Communications (NYSE:LVLT, news, filings) and Global Crossing have combined, it is much easier to make a case for a further merger with part or all of Reliance Globalcom later this year than it ever was before.  In addition to more transatlantic capacity, buying FLAG would give them further inroads in the Middle and Far East plus the relationships in India that being part of Reliance has brought.

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Categories: Mergers and Acquisitions · Undersea cables

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4 Comments So Far

  • Anon says:

    Even $1Bn seems ambitious. What’s the portfolio? FLAG Atlantic (good cable but in the most competitive subsea market in the world), FLAG (old cable, nearing its upgrade limit, hostile landing in India, doesn’t go to Singapore), FALCON (good cable for which the glory days are over now there is competition in the Gulf), HAWK (necessary to extend FALCON since FLAG is out of capacity) and FNAL (facing massive competition, not the least of which comes from Telstra which owns half the capacity on the same cable).

    How this in any way is worth $1Bn I just cannot see. The valuation has to be somewhat related to revenues and Reliance has kept that bit totally opaque since 2009/10.

    • Rob Powell says:

      Yes, the revenues are the big question. I suppose I assume they must be reasonable, else the price tag would be crazy. On its own, the portfolio doesn’t seem too attractive – as you say. Combined with other assets and repurposed such as what NTT has done with PC-1, maybe there is more that could be done with it?

      • Anon says:

        PC-1 is only repurposed insofar as NTT has a lot of capacity between Japan and the US they need to carry, and for $90M it was cheaper to buy PC-1 than to take capacity on other systems. It also has some attraction in that (by 2ms) it is the shortest route between the US and Tokyo, so some of the nosebleed end of the algo traders are interested in it.

        The FLAG portfolio has none of these uniques. Reliance is a relatively small IP transit provider, they’re not investing in the business and, apart from the Atlantic and perhaps FNAL, none of the routes are particularly key for ISPs either.

        I struggle to see how FLAG as a standalone can be generating much more than $400M in revenues, and a proportion of that will be to its corporate parent anyway. Is buying a company with $400M in revenues in a very capital-intensive and highly competitive market for $1Bn a good buy?

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