VSNL/Tyco Deal in Jeopardy

On Dec. 13, 2004, Indian telecommunications giant VSNL was sued in U.S. Federal District Court for the Southern District of New York by its partner Polargrid LLC USA for damages exceeding $1.5 billion resulting from a breach of contract by VSNL in connection with its bid to buy TycoTel's global fiber optic cable network known as TGN.

On May 10, 2005, on CNN, Polargrid President Jim Hickman commented that VSNL's behavior has potential implications for U.S. security agreements signed by VSNL regarding guarantees for U.S. access to the TGN network. Lou Dobbs responded with an expression of concern about the speed with which this transaction was approved.

In the lawsuit, Polargrid maintains that VSNL induced Polargrid to enter into their contractual relationship in order to remove Polargrid as a competitor from the bidding process for TGN. VSNL is now poised to consummate its acquisition of the TGN assets.

Polargrid is primarily seeking to compel VSNL to fully perform under the parties' contract. In the alternative, Polargrid is seeking damages in excess of $1.5 billion or for the court to enjoin VSNL from consummating the transaction.

Beginning in 2001, Polargrid's affiliate, Polarnet Project Ltd. (U.K.), began the design and construction of a state-of-the-art undersea fiber optic cable project that will directly link Europe, China, North America and Japan via the shortest and lowest-cost route: under the edge of the Artic ice cap (the Arctic Route). During the past three years, Polarnet has secured licenses and permits, conducted surveys and acquired certain assets necessary for it to complete this project. Essential permits for the Artic Route have been issued by the Russian and Norwegian governments and a survey of the final route has been completed at a cost in excess of $35 million.

Since 2003, Polargrid and Polarnet Project Ltd. have been negotiating an agreement with Tyco Telecommunications (U.S.) Inc. (TycoTel), under which TycoTel will construct the international fiber optic cable system at a cost of approximately $800 million. The proposed deal with TycoTel always included access for Polargrid to the existing TGN global network consisting of undersea and terrestrial fiber optic capacity and facilities. TycoTel is owned by Tyco International Ltd.

In late 2003, Tyco retained Goldman Sachs & Co., a New York investment banking firm, to conduct an auction for the sale of TGN. Polargrid and VSNL were both bidders for those assets.

Polargrid representatives met with VSNL representatives beginning in May 2004 to discuss their overlapping strategic business interests, including the possibility of collaborating on the acquisition of the TGN assets. This led the two companies to enter into a contract on June 28. Under the terms of their contract, Polargrid withdrew from the bidding for TGN, gave VSNL the right to use its $800 million supply contract with TycoTel as an element of VSNL's bid for TGN, and agreed to collaborate exclusively with VSNL with respect to their bid.

In consideration for Polargrid's agreement to collaborate with it in the bidding for TGN, VSNL agreed to provide initial funding of $30 million for TycoTel to begin constructing the Artic Route and agreed to sell or lease Polargrid certain designated undersea and terrestrial fiber optic bandwidth capacity on TGN's network. This bandwidth has been a critical part of Polarnet's infrastructure design since its inception.

On Nov. 1, 2004, VSNL and Tyco announced that VSNL had won the auction for TGN. Tyco accepted a cash price of $130 million (plus the assumption of certain liabilities), which was far below the minimum of $250 million that VSNL and Polargrid had previously estimated.

Simultaneous with announcing that it won the bidding for TGN, VSNL expressly repudiated its obligations to Polargrid under their contract. As a result, Polargrid commenced its legal action.