attbsnlAn unconfirmed ET report says US telco AT&T may be planning to pick up a 10% stake in public sector unit BSNL. According to the report, BSNL’s top brass have passed the buck to the government, which might not be amenable to selling the stake. The telco’s MD and CEO Kuldeep Goyal has denied the development.

BSNL is a wholly owned unit of the government and has a nation wide coverage, offering landlines, mobiles, 3G, broadband and dial-up Internet, as well as IPTV services. In terms of offerings, it has a good fit with AT&T which also offers this bouquet in US through subsidiaries, affiliates and operating companies.

Here are five reasons why we think this is not a sensible move on AT&T’s part, if it is considering acquiring a stake in BSNL:
a) Aggressive Worker’s Union: BSNL’s powerful and virtually uncontrollable employee union is likely to be up against AT&T, a foreign player investing in it, for the same reason it is against BSNL going public. It dislikes change. Workers recently held an Anti-Disinvestment Day and followed up with a 48 hour strike demanding wage revision and confirmation of employees that resulted in a nation-wide disruption of its services. BSNL has 55,000 employees.

b) Political Pressure & Exit Strategy: AT&T might find that both its entry and exit will depend heavily upon the political atmosphere; the investment might just end up being a financial one, with little or no say in the functioning of BSNL. Given that BSNL is a government owned telecom operator, and telecom is an industry with national security implications, AT&Ts exits are likely to be limited at best, and may be even determined entirely by government choice. We doubt whether any government will allow a foreign telco a majority stake in BSNL.

c) Red Tapism: AT&T should be ready for miles of red tape. BSNL is not listed and any such deal will have to undergo various regulatory approvals before it can take such a step, BSNL chairman and MD Kuldeep Goyal told ET. Besides that, BSNLs tendering processes take forever due to red tapism, which has allowed nimbler private players to beat the operator.

d) Poor Financials, Declining Marketshare: BSNL has been facing declining revenues with profit in FY09 falling 96.5%  to Rs. 1.04 billion. BSNL currently has a 12.67%  share of the mobile phone market in India, and private operators Bharti Airtel, Reliance Communications and Vodafone Essar have raced past it. BSNLs marketshare has been declining: it was once number 3.

e) Inefficient Operations: BSNL is grappling with poor efficiency, imprudent financial management, litigations and allegations of corruption in its tendering and bidding processes. It is losing revenues with landlines being disconnected (0.16 million landlines were disconnected just in July 2009). It announced  restructuring but the project is now on hold. It is also undertaking measures like sharing its passive infrastructure (towers) to bring down costs.

But BSNL does have quite a few things in its favor: it owns the largest wireline network in India, is India’s largest ISP, and alongwith sister concern MTNL, it has precious last mile access. The last mile in India has not been opened. BSNL is also guaranteed spectrum in all auctions in India, and the public sector telcos have in the past been first in the pecking order for allocation of spectrum when it does become available, much to the chagrin of private telcos. Still, the challenges appear to outweigh the opportunities, in our opinion.

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