Tata's offer of $2.99 billion for VSNL, India's largest Internet service provider and its monopoly international long-distance service provider, was 18 percent higher than the government's reserve price of $2.55 billion. It was also 7 percent higher than rival Reliance Industries' offer of $2.8 billion.
The Feb. 5 deal ushered in full-fledged telecom reforms and added another layer of competition to the largely state-dominated sector, which also includes a few privately held companies.
With VSNL in its kitty, experts say, Tata is set to emerge as the "third force" in the telecom sector, providing integrated service to the $8 billion Indian market, which is expected to double in three years.
The "primary force" is the two state-owned integrated telecom companies, BSNL Ltd. and MTNL Ltd., which control about 95 percent of the basic or the fixed-line telephony in the country. The "second force" is the clutch of private-sector companies that mainly offer mobile telephony services. Three of these -- Tata, Bharti Group and Reliance -- offer basic services.
"We are pleased to have been successful in our bid for VSNL, which will facilitate the enhancement of the spectrum of our telecom services," said Tata Chairman Ratan Tata. "This meaningful acquisition will enable us to meet our objective faster and help in providing end-to-end quality services to our customers."
Analysts said Tata's stake in the New York Stock Exchange-listed VSNL would make the telecom giant more professional.
"To begin with, VSNL's divestment to the Tatas will bring in a professional management at the helm," said R.S.P. Sinha, VSNL's finance director. "Its huge cash reserves could be used in a more productive manner."
They said the new ownership would also give VSNL operational flexibility and marketing ability, both of which were missing under government control.
The Tatas already have a significant cellular footprint by virtue of being part of BPL-Birla-AT&T-Tata. The combine will be present in seven Indian states -- Andhra Pradesh, Maharashtra (including Bombay), Gujarat, Kerala, Delhi, Madhya Pradesh and Tamil Nadu.
The group will also be present in five basic telephony circles -- Andhra Pradesh, Delhi, Tamil Nadu, Gujarat and Karnataka. Tata sources said the group had plans to enter others states such as Kerala, Punjab and Haryana.
"What we did not have was international long distance and national long distance operations," said S.H. Rajadhyaksha, a senior vice president of Tata Industries. "The missing picture will be filled in by VSNL."
With the new telecom policy, however, VSNL's current ILD monopoly, which accounts for 87 percent of its revenues, will end April 1.
"The times ahead are expected to get tough for VSNL, a company that is used to the comforts of being a monopoly player since its inception, when competition from a number of new players, who are firming up their entry into ILD through overseas tie-ups, sets in post April 1," said Rahul Singh, a telecom analyst with SSKI Securities. "Moreover, Internet telephony too is set to open up from April which could dent VSNL's revenues further."
In the long term, the challenge would be for VSNL to emerge as a provider of integrated communication services with other telecom companies. With the Tatas' backing, it might well achieve that, other experts said.
"The deal with Tatas is good for VSNL as it will now have better management freedom and faster decision-making," said Kaushik Poddar, director KB Capital Markets, adding, "with a revenue base of almost Rs 80 billion ($1.8 billion as of March 2001), its debt-free status and Rs 40 billion ($900 million) asset base, VSNL can enter newer areas with the Tatas."
The mood in the downtown Bombay headquarter of the Tata Group is said to be jubilant, and experts say if the pace of telecom reforms continue at the same pace, the jubilation will be spread to Indian telephone users. International call rates are expected to come down dramatically in India, they say.