Why is Tata Com trying to acquire British telco C&W?

Tata Communications Ltd is preparing to bid for Cable & Wireless Worldwide Plc, a British company that has fixed lines that are used by mobile operators to provide links to mobile transmitters and switching offices.

In a BSE announcementon Thursday, it said, "TCL is evaluating a possible cash offer for Cable & Wireless Worldwide Plc." A Reuters report estimated C&W value at $1.2 billion (Rs 6,000 crore).

[caption id="attachment_230815" align="alignleft" width="380" caption="Purchasing C&W isn't likely to benefit the company in any significant way immediately, given that the British company is also in dire straits"][/caption]

So why is Tata Communication seeking to acquire another company? It already has enough to deal with on its plate. In 2008, it snapped up a 49 percent stake in Neotel, a company providing services -similar to those of Tata Communication - in South Africa. Then in June 2011, it raised its stake its Neotel from 49 percent to 61.5 percent. The entire process left a debt of $1.5 billion (Rs 4500 crore) on its balance sheet.

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Tata Communication has yet to reap the benefits of the Neotel deal. In 2010-11, Tata Comm made a loss of Rs 854 crore, Rs 551 crore of that was from the Neotel subsidiary. Only in the second quarter of this financial year (June-Sept), did Neotel turnpositive at the operating profit level for the first time.

The core business of Tata Communication also posted a net profit in the third quarter this year, although at a consolidated level, it still nursed a loss of Rs 126 crore.

Purchasing C&W isn't likely to benefit the company in any significant way immediately, given that the British company is also in dire straits after itsplit from its cable and wireless business division.C&W had to write off 624 million pounds in November and has not recovered from its crisis yet.

Ratings agency Crisil, in a report on the company said the lack of captive telecom subscribers was a big weakness for Tata Communications. And yet the company continues to be in spending mode. In the past four years, Tata Communications has undertaken large capex programmes totalling Rs 10,000 crore. As a result, its debt-equity ratio jumped to 2.5 times at the end of March 31, 2011, from about 1.5 two years ago.

Vinod Kumar, the managing director and CEO,recently mentioned that the company would need to raise equity of around Rs 2,500 crore over the next three years. The company has also pencilled in plans to spend Rs 1250 crore annually for upgrading broadband services and telecom cables.

So many plans, even before the Neotel acquisition has been fully digested. And now, Tata Communications has another target company in its sights. Financially, it can only weaken the company further at a time like this.

So, what's the point in acquiring C&W?