Reliance snaps up FLAG Telecom for a paltry USD207 million

17 Oct 2003

Reliance Infocomm, India’s largest private equity group, has struck a deal to acquire Bermuda-based FLAG Telecom for USD207 million through its wholly owned subsidiary Reliance Gateway Net Private Ltd, in what will be of the biggest ever overseas purchases by an Indian company. FLAG Telecom, whose name is derived from the Fiber Link Across the Globe network, is a leading provider of international network and communications services. Its sizeable assets comprise the 14,500km FLAG Atlantic-1 (FA-1) self-healing ring connecting the US to the UK and France; the 28,000km FLAG Europe-Asia cable which lands at 16 points in 13 countries; and the recently completed 10,000km FLAG North Asia Loop/REACH North Asia Loop, which it developed jointly with REACH. Nasdaq-listed FLAG, which enjoyed a market capitalisation of USD7 billion at its peak, experienced severe financial difficulties following the telecoms downturn, culminating in it filing for Chapter 11 bankruptcy in 2002. The carrier reported losses of USD787.4 million in the first nine months of 2002, compared to a loss of USD170.8 million for the same period of 2001. Despite this, the company emerged from bankruptcy in October 2002 following a USD1.4 billion restructuring, and booked USD55 million worth of orders in the next six months.

Reliance and FLAG Telecom are now believed to have entered into an Agreement and Plan of Amalgamation under which Reliance will buy 100% of FLAG’s common shares on a fully diluted basis at USD95.61 per share – representing a premium of 50% on FLAG’s closing share price yesterday. The deal is something of a snip for the Indian firm. Telegeography/PriMetrica estimates that the recently completed FLAG North Asia Loop/REACH North Asia Loop cost the joint venture USD750 million to build, while the Atlantic section and Asia-Europe networks cost around USD1.1 billion and USD1.6 billion respectively. Upon completion of the purchase, Reliance customers will gain global access at significantly lower rates. FLAG shareholders are expected to meet in December to approve the deal.