Reliance Globalcom: Build and buy

Reliance Globalcom is the carrier’s carrier business of India’s Reliance Communications (RCom). Established in 1999 as Reliance Infocomm by renowned entrepreneur the late Shri Dhirubhai Ambani, founder of India’s Reliance Industries conglomerate, the carrier business was conceived to realise Ambani’s vision of bringing affordable communications to the masses.

Today, India is one of the world’s fastest growing telecoms markets. Teledensity reached 58.2 in July (source: TRAI), while the Department of Industrial Policy and Promotion anticipates investment of $40 billion during the current fiscal year, driven by 3G development, network expansions and broadband wireless access. Extensive liberalisation of India’s telecoms market saw the country divided into 20 circles and enabled the entry of private telcos. RCom has ridden this wave, charting a course from domestic competitive carrier to global operator of one of the world’s largest private IP connectivity infrastructures.

RCom commenced construction of a 60,000km pan-India, fibre-optic backbone in 2000 and went on to launch fixed wireless telephony, public call office (PCO) and broadband (FTTB) in 2003. That same year, it introduced international long-distance (ILD) services and Reliance Indiamobile, which now operates under the RCom brand. India’s second largest mobile service provider by subscriber numbers (113.3 million as at July 2010), RCom recently paid $1.91 billion for 3G spectrum in 13 service areas, including the most lucrative Mumbai and Delhi circles.

“It has been an exciting journey for us,” says Punit Garg, president and CEO at Reliance Globalcom (RGCom), the driving force behind the transformation. “Our fixed wireless telephony business launched with more than one million subscribers, whilst our network of public call offices grew to 200,000 within the first year and is now one of the world’s largest, with over one million sites. In the enterprise sector, we have connected 1.8 million buildings with fibre, and serve 85% of India’s top 1,000 customers.”

However, it has not all been plain sailing. Following a widely-reported feud between Ambani’s sons, a demerger in 2005 saw Reliance Industries split between the two brothers. Mukesh Ambani took control of the energy and petrochemical business, while Anil Ambani inherited power, financial services and the emerging telecoms business. 

RCom burst onto the world stage in 2004 with its $207 million acquisition of Flag Telecom’s international wholesale business. Two years previously, Flag had emerged from Chapter 11 bankruptcy but had continued to incur losses as a result of a global recession. A number of carriers had been linked with Flag, and given Flag’s debts some industry commentators questioned whether RCom had paid over the odds.

But RCom was confident that Flag’s global fibre-optic network provided a good fit with both its domestic assets and its international business. The Flag acquisition allowed it to offer end-to-end solutions to multinational customers, and deliver carrier-focussed services. It also came with 50,000km of subsea cable that had cost an estimated $3.5 billion to construct. Bhavesh Gandhi, analyst at India Infoline, comments that: “Obtaining ready-made capacity from Flag saved Reliance a lot of time and capex.”

Within a month of acquiring Flag, RCom committed $450 million to the construction of Falcon, an 11,600km, 1.28Tb cable stretching from the Middle East to Egypt in the west and to India and Hong Kong in the east. Falcon was essential in allowing the company to reach emerging markets and meet significant growth in telecoms and data traffic in the Middle East, India and China. “Our strategy was very simple,” says Garg. “Expand with cable connectivity to areas that are underserved.”

Following the completion of Falcon in 2006, RCom embarked on a three-year $1.5 billion network expansion to connect 60 key markets via an all-IP next-generation network (NGN). Comprised of four subsea cable systems (Asia, Africa, Mediterranean and Trans-Pacific), the Flag NGN project is due for completion this year. Currently, RCom operates 275,000km of fibre-optic cable, with landing points in 30 countries. 

In 2008, RCom integrated its global businesses – voice, managed network, carrier Ethernet and fibre capacity – into RGCom. This created an umbrella brand with revenues of $1.32 billion and EBITDA of $334 million.

Later that year, RCom acquired Vanco, a major virtual network operator (VNO), for $76.9 million; and Reliance Infocom, an RCom subsidiary, purchased a controlling stake in eWave World. Shortly afterwards, RCom also acquired US-based Yipes for $300 million in cash and said it would invest $200 million to more than double Yipes’ metro coverage in the US. And in 2009, RGCom and China Telecom announced the opening of the first direct terrestrial cable linking major cities in India and China – providing RGCom with route diversity.

Garg continues: “We looked at the US and Europe, which have the biggest enterprise markets, and realised that if we really wanted to succeed with our connections in Asia (which is where our real strength lies), we needed to have our own unique space where we could stand taller than anyone else.”

RGCom aims to integrate Vanco, Yipes and Flag into a single global data services player serving enterprises, integrators and other carriers. Vanco is being repositioned as a hybrid, taking the best of its VNO skills, local carrier knowledge and relationships, and combining that with Yipes’ global Ethernet capability and Flag’s global backbone. The crux of this strategy is the belief that network outsourcing will become increasingly prevalent and that global managed services will be the real revenue driver moving forward.

“Local carriers are going to focus on what they are good at and will outsource their global connectivity needs,” says Garg. “This calls for bandwidth on demand, reliability, route diversity and portability, and this means the application of our network in the global arena for our carrier customers.”

RGCom has had to invest a further $50 million in deploying a global service delivery platform incorporating an automated flow-through system for service assurance and flexibile delivery, but still has to integrate its culturally-diverse organisations. “It’s all about execution and how fast they can do it,” says Sandra O’Boyle, service director, business network and IT services at Current Analysis. According to O’Boyle, RGCom has been quick to recognise that enterprises investing in India would need connectivity into the US and Europe, and has also seen the value in driving Ethernet in WAN transport, end-to-end, while migrating directly to Ethernet VPLS. The latter, says O’Boyle, is one of RGCom’s key differentiators, given the reluctance of other carriers to migrate.

Currently, RGCom’s three business lines embrace carrier, enterprise and retail. Carrier comprises international connectivity and data services for telecom operators, content providers, internet communities and national long-distance carriage and termination to other carriers. RGCom claims more than 200 wholesale customers based on long-term relationships with 70% repeat orders.

The enterprise business serves more than 200 corporate customers and 70,000 sites in 163 countries. RGCom is among the top five providers of global managed network services (Gartner 2008) and, with 1,200 Ethernet customers, is among the top six global Ethernet providers (Vertical Systems, 2009). In retail, 2.5 million customers in 15 countries use Reliance Global Call ILD, a web-based international calling service reaching 200 destinations and claimed to account for 40% of total retail market calls from the US to India.

A number of challenges remain. RGCom competes against larger carriers with deeper in-country network penetration, larger operational resources, strong customer support and local partnerships, and must increase its brand recognition outside home markets. Meanwhile, RCom is carrying a high level of debt (currently $5.5 billion), but says it will reduce this within three years. It is currently seeking to sell a 26% non-controlling stake to a foreign carrier or investment partner. Earlier this year, there were reports suggesting that RCom was looking to sell its overseas operations, including Flag and Yipes.

Garg dismisses these reports as “pure speculation”, and is confident of RCom’s strategy. “We focus on private build, and I will continue to build those cables wherever the opportunity is.” Crucially, Garg believes the carrier has the financial muscle to support this strategy. “We are open to new investments or acquisitions, provided with the right market opportunities.”

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Reliance Globalcom milestones

1999: Reliance Infocomm began project planning  2000: Optical fibre laid in Gujarat, Andhra Pradesh and Maharashtra 2001: Punit Garg joined as president to lead the planning and launch of fixed wireless phones, public call office and broadband services 2002: Reliance Infocomm obtained international long-distance licence from Government of India; commissioned first fibre-optic backbone ring; established first point of interconnect in New Delhi 2003: International long-distance services launched; commissioned all backbone rings; Reliance Indiamobile service launched 2004: Reliance Globalcom acquired Flag Telecom’s international wholesale business for $207 million; Flag Telecom announced Falcon Project, a major new Middle East Submarine Cable System; announced India’s first MPLS global VPN solution in partnership with MCI 2005: Demerger of power, financial services and telecommunications businesses from Reliance Industries Limited (RIL); agreement with China Telecom to provide direct telecoms service to India and China 2006: Punit Garg appointed president of Reliance Globalcom; Reliance Communiations listed on the Bombay and National Stock Exchanges; Falcon Cable System inaugurated; plans to build $1.5 billion Flag NGN announced based on IP and comprising four subsea cable systems 2007: Shareholders approved tower business demerger; RCom’s market capitalisation topped $24.39 billion on Bombay Stock Exchange 2008: RCom announced umbrella brand Reliance Globalcom for all its global initiatives; acquired global Wimax operator eWave World; acquired Yipes for $300 million and Vanco for $76.9 million 2009: Announced world’s largest global VPLS-enabled Ethernet network; opened first terrestrial cable link between China and India; revealed plans to double data centre operations; advised on sale of overseas operations including Flag and Yipes to raise $3 billion in cash; agreement with Bharti Airtel to build and operate Southeast Asia Japan Cable 2010: RCom issues statement to Reuters denying that Globalcom unit is up for sale, whilst Reuters claims it has documents proving otherwise; board approves sale of up to 26% stake in the company to strategic or private equity investors; also says M&A opportunities will be explored