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JULY 16, 2004
By Steve Rosenbush An Indian Rescuer for Tyco's Cables? Tata's VSNL telecom unit is leading a growing line of suitors for the struggling global network that CEO Ed Breen is unloading Tyco International may soon disentangle itself from the web of undersea and overland telecom wires that have tied the mighty conglomerate in knots. A number of potential buyers have emerged, led by the telecom unit of India's Tata group, to acquire the company's global network, BusinessWeek Online has learned. Chief Executive Ed Breen, the GE veteran who replaced scandal-tainted predecessor Dennis Kozlowski, first began shopping the asset around last November as part of his restructuring plans for Tyco (TYC ). Tata's VSNL unit appears to be the most interested in buying Tyco Global Network, which was valued at $3.5 billion during the height of the telecom boom in the late '90s, according to one source familiar with the matter. "They're looking hard, on-site, and doing due diligence," this source says, adding that VSNL was considering a price in the low "$200 million range." However, Tyco spokeswoman Gwen Fisher says the conglomerate had hired investment bank Goldman Sachs (GS ) to auction the telecom business as part of a broader restructuring. "The purpose is to sharpen the focus of the business, simplify operations, and improve the cost structure," she says. Other potential buyers are looking at the assets, which include transatlantic and transpacific cables and lines across Europe and the U.S. Bidding could continue for at least several weeks. TOO HIGH, TOO LOW. Pivotal Private Equity in Phoenix has also shown keen interest in Tyco Global. Pivotal owns Internet domain pioneer Network Solutions and has been acquiring telecom assets of late. It purchased PG1, a bankrupt Pacific cable outfit formerly owned by Global Crossing, for $63 million, a fraction of the original $1.3 billion value. "We're very interested in consolidating subsea networks. We think consolidation will lead to more attractive economics for the business," says Pivotal Private Equity chief executive Jahm Najafi. Other interested parties include Reliance Infocomm, which provides telecom services in India. Trinity Ventures, in Menlo Park, Calif., has also taken a look, people familiar with the matter say. Singapore Technologies also is interested. But that Asian conglomerate already has its hands full with its troubled Global Crossing (GLBCE ) acquisition, which is losing more money than it expected. On May 19, Singapore Technologies gave Global Crossing a $100 million bridge loan to finance business operations. The fire-sale price reflects the economic devastation that has swept through the undersea cable business, catching big players like Tyco and Global Crossing by surprise. No sector of the telecom market rose as high or has fallen as far. Starting in 1998, Global Crossing created huge payoffs for early investors like the first President Bush. But as rivals rushed to duplicate Global Crossing's success in wiring worldwide networks, the industry collapsed. The newcomers bet that they had a late-mover advantage because their networks had much more capacity, and at a lower price per bit. Global Crossing's Atlantic cable, which cost $750 million, had a capacity of 160 megabits a second. A few years later, Flag Telecom built a $1.1 billion network that carried 2,400 megabits a second. BARGAIN BUYS. The problem is that demand didn't rise fast enough to fill up the pipes, so the theoretical cost advantage never was realized. "The price of undersea cable capacity has fallen 80% to 90% over the last three or four years," says Stephan Beckert, director of research at market analyst Primetrica's Telegeography unit. A new generation of investors is betting that the undersea cable industry's economics will eventually turn around. Pricing has started to level off on overland routes. "Eventually, prices have to stabilize on undersea routes," Beckert says. When that happens, new owners hope to stem operating losses and make money on networks that they picked up for a song. Last month, Australian telecom carrier Telstra (TLS ) and Hong Kong's PCCW (PCS ) bought their $1.2 billion undersea REACH network back from their banks for $311 million. Columbia Ventures bought 360 Network's $770 million transatlantic cable for just $17 million. It could take years to earn a return on the investment. Pivotal Private Equity's Najafi says it will be two to four years before new owners can stabilize prices and produce the financial benefits of consolidation. But 5 to 10 years from now, he believes that the rising tide of broadband traffic around the world will eliminate excess capacity on many of today's underutilized networks. "We're long-term investors," Najafi says. HUNGRY FOR BANDWIDTH. A buyer such as Tata has a strategic interest in Tyco's assets, too. VSNL, India's incumbent international phone company, has lots of inbound capacity. But it lacks outbound bandwidth -- a gap that the Tyco assets could help fill. And Tata chairman Ratan N. Tata, 67, is investing $3 billion to expand the conglomerate's telecom operations. He has had success overhauling other parts of the Tata empire and now wants the same results from telecom (subscribers, see BW, 7/26/04, "Ratan Tata: No One's Doubting Now"). Tata's VSNL unit is under increasing pressure from Reliance. The rival Indian telecom carrier has expanded its global networking capacity by acquiring Flag Telecom's assets. Firdaus Vandrevala, the CEO of Tata's telecom venture, says VSNL, which is building a submarine cable from Chennai in Southern India to Singapore, has some international capacity but not enough. "Tyco will give us global bandwidth and give us both Pacific and Atlantic capacity," he says. As for Tyco, it has had enough of the undersea cable market. A cornerstone of the go-go strategy that prevailed during the Kozlowski era, Breen will no doubt be relieved to put this part of the Tyco story behind him.  Rosenbush is a senior writer for BusinessWeek Online in New York Edited by Douglas Harbrecht
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