In less than three years since the acquisition, Reliance Communications has turned around Flag Telecom. It now wants to leverage Flag’s assets to fulfil its global aspirations. A little less than three years ago, when Reliance Infocomm (now Reliance Communications) acquired Flag Telecom, a distressed asset, for $207 million, opinion was divided. Would it be Reliance’s ticket to the global markets or was it an overpriced buy in a sector plagued by excess capacity? Though Flag had emerged from Chapter 11 bankruptcy proceedings, it had been on the block for over a year before Reliance picked it up. And it was still making huge losses — in the six months ending June 2003, the company made losses to the tune of $41 million.

Cut to 2006. Flag has broken even (in the quarter ending September 2006) and is largely responsible for the five-fold jump in the Ebidta margins of Reliance’s global business in the past six quarters (from 4.7 per cent in June 2005 to 24.3 per cent in September 2006). Look at it this way — 25 per cent of Reliance Communications’ revenues and Ebidta margins come from its global business, and Flag is a major contributor. Another 25 per cent comes from Reliance’s enterprise business, in which Flag is the backbone for all voice and data traffic out of India. Since its listing in March, Reliance’s market cap has gone up exponentially, from Rs 35,575 crore to over Rs 85,000 crore — Flag is seen to be one of the key drivers for its valuation. Between January and September, Flag Telecom has sold bandwidth to the tune of $450 million. “Flag is on an expansion path,” says Punit Garg, CEO, Flag Telecom. Now that it has put Flag back on its feet, Reliance wants to leverage Flag’s assets to grow its global operations.

Bridging The Missing Links

With the acquisition of Flag, Reliance owned 50,000 km of submarine cables criss-crossing the globe. At the time, there was a profusion of submarine cables, especially in the trans-Atlantic and trans-Pacific regions. Also, if Reliance focused on providing connectivity to the US — where the maximum traffic comes from — it would have to take on global giants like AT&T and British Telecom on their home turf.
The biggest advantage Reliance has is that Flag’s network is very well-positioned in the Europe, Middle East and South-East Asian regions (see ‘Flag-Owned Submarine Cable System’). These are predicted to be major growth drivers of international data and voice traffic over the next few years. In the Middle East and Africa, deregulation has opened the market to private players, which is expected to fuel growth rates more rapidly than many other markets. A study by consultancy firm Ovum estimates that the demand for international capacity from Oman, Qatar, Bahrain, Kuwait and Iran would grow by 1,000 per cent between 2003 and 2010. Incidentally, Oman Telecommunications Company (Omantel) is keen on acquiring a stake in Flag Telecom.

This, then, is Reliance’s strategy for Flag: by targeting untapped but growing markets like the Middle East and Africa, Reliance wants to position itself as a key player in these regions. But other telecom providers are also eyeing these lucrative markets. VSNL is looking at tapping the India-Europe traffic as well as the Asian markets, and has announced two consortium cables costing $600 million. The two cables — one linking India and Europe, the other linking Singapore, Hong Kong and Japan — are expected to be lit in 2008. Reliance’s edge over rivals is that it acquired this network at a throwaway price. Compare the cost of acquisition with how much Reliance spent on the Falcon submarine cable system. Reliance bought over 50,000 km of submarine cable for $207 million, and it spent $400 million on building the 11,600-km long Falcon cable system in September, to leverage Flag’s assets. The 2.56 terabit Falcon cable system is integrated with the Flag network, and runs through 11 countries, mostly in the Gulf region and North Africa. With 14 landing stations along the way, Falcon’s aim is to provide connectivity to markets, which are either unconnected by submarine cables (like Maldives, which has so far been connected only by satellite) or under a monopolistic telecom regime.

In Saudi Arabia, it has two landing stations on the Falcon network. For one, it has tied up with Saudi Telecom, the incumbent operator. For the other, it tied up with Etihad-Etisalat, the challenging operator. So, between the two, Reliance has a 100 per cent market share in the region, for international connectivity. Flag is also keen to tap key Asian markets, especially Japan. It has direct connectivity to Taiwan, South Korea and China. Flag claims it has already sold as much as 50 per cent of lit capacity on Falcon. Reliance has been pumping money into upgrading the Flag Europe Asia (FEA) leg of the Flag cable system. In May, Flag won the arbitration case against VSNL, which allowed it to upgrade capacity on the FEA system and lease it to international telecom entities.

Global Talent For Global Business
One of Reliance’s first moves to integrate Flag into its business was to get the global carrier’s top management team in place. In the past year, it has made five key appointments. First, it appointed a new Indian head, Punit Garg, who previously headed Reliance’s international business division in April, to replace Flag’s CEO Patrick Gallagher.

With Flag’s assets, Reliance is keen to move into new segments like enterprise and services. To run Flag as a global company, Garg thought it was crucial that the team should comprise skilled talent, with experience in handling large global operations — typically from the global carrier giants such as Verizon and Sprint. To head its American operations, Flag hired Mike Sauer, former head of global business at MCI Telecommunications Corporation. For the Europe and Middle East operations, Garg hired Mark Heraghty, former CEO of Cable and Wireless Europe. He got Bhaskar Thyagarajan from Sprint-Nextel to be vice-president (marketing) and to head the products team in India. For the marketing and strategy head, Garg went after Jarrett Appleby, head (strategy) of MCI (Verizon). “It took me more than six months to persuade him,” says Garg. Flag has also increased its workforce by 15 per cent post-acquisition.