BRITISH TELECOM (BT) INKS $1.5B DEAL WITH TATA COMM

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BRITISH Telecom (BT) group has signed a fiveyear voice outsourcing deal with Tata Communications (TCOM, earlier VSNL). The agreement, under which BT will outsource its entire international voice traffic to TCOM, is estimated to generate revenues of over $1.5 billion for the Tata group company over the five year period.

   TCOM will offer voice carriage and termination services to BT for various destinations. Call termination refers to the routing of calls from one company to another and charges for it are paid by the operators on whose network the call originates to the company on whose network the call ends.

   “TCOM will become BT’s primary supplier of international direct dial and other voice termination services outside BT’s own footprint countries. BT will become TCOM’s main distribution channel for its traffic into the UK, expanding into other markets across Europe as the relationship matures,” TCOM said in a statement in Mumbai.

   Back of the envelope calculations show TCOM could earn over $1.5 billion from the deal. The company reported 24 billion minutes of traffic last year, which brought in around $1.2 billion. “The current agreement could bring in approximately 6 billion minutes for TCOM,” senior VP-Corporate Strategy Srinivasa Addepalli said.

   The deal offers some relief to TCOM at a time when growth in its revenue from voice services, which forms nearly half of total revenue, has slowed. Importantly, the additional voice traffic will be generated without any significant ramp up in its network costs. This will improve TCOM’s network utilisation thereby improving margins from the voice business though the exact extent is difficult to determine since the company has not provided consolidated information for its individual businesses.

   On a stand-alone basis, the company’s operating margin from the voice business was 19% in FY09. At this level, the deal with BT is likely to boost its consolidated operating profit by Rs 300 crore annually. This appears to be a big positive for the stock given that its operating profit for FY09 was Rs 247 crore. The TCOM stock rose by nearly 2% on the BSE following the announcement before closing 0.5% higher at Rs 458.9.

   TCOM president of global voice solutions Michel Guyot said, “The agreement will increase both partners’ competitiveness and will enhance the respective service offerings.” The statement said that the relationship will allow BT and TCOM to benefit from their respective extensive global networks and advantageous cost structures. “BT will also have access to TCOM’s routing capabilities and online management systems, providing greater economies of scale that will improve BT’s competitiveness in the international calls market,” it added.

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