Garuda and Bank Mandiri start marketing for share sales

Investors looking to increase their exposure to Indonesia will have at least two potential targets to choose from early in the year as the government continues to reduce its stake in the country’s flagship assets. Yesterday, bankers started investor education for Garuda Indonesia’s upcoming initial public offering, which is expected to raise about $500 million, while Bank Mandiri kicked off the domestic roadshow for its rights issue that could raise as much as $1.6 billion.

Like the Bank Negara Indonesia rights issue in November, the government will not take up its 66.7% entitlement in the Mandiri rights issue but will sell the shares through a capital markets placement. This means that at least two-thirds of the issue will be open to institutional investors who are not currently shareholders of the bank, and hence the offering is attracting a lot of attention in the market. Minority shareholders can also sell their rights in the market if they don’t want to buy more shares.

The Garuda IPO too is attracting a lot of initial interest, according to sources. The part-privatisation of the country’s flagship airline has been talked about for years, and comes after a drawn-out five-year debt restructuring that was finally completed in December, leaving the airline in significantly better shape both to expand its operations and to approach equity investors for capital. Garuda was also named the world’s most improved airline by Skytrax in 2010 – an important award since it is based on passenger surveys. Skytrax is an independent London-based research firm focusing on the air transport industry.

The IPO hits the market at a time when the Indonesian economy is doing very well on the back of increased consumer spending and exports to China. In early December, Moody’s placed the country’s foreign and local currency bond ratings of Ba2 (two notches below investment grade) on review for a potential upgrade, citing economic resilience accompanied by sustained macroeconomic balance, improving government debt and foreign currency reserves, and an economic policy framework that is increasingly well positioned to deal with evolving macroeconomic challenges and potential shocks.

Indonesia was also the best performing among the major markets in Asia last year with a 46.1% gain (ahead of Thailand with 40.6% and the Philippines with 37.6%) supported by the strong economic growth, as well as a strengthening currency and the return of investor risk appetite. This prompted a lot of interest from international investors. According to Reuters, Indonesia attracted $2.18 billion of foreign portfolio inflows in 2010, which was more than double the level in 2009. Some of that money found its way into the market through primary issues like the IPOs of Indofood CBP, Harum Energy, Berau Coal Energy, Bumi Resources Minerals and state-owned Krakatau Steel, the re-IPO of mobile phone operator XL Axiata and several sizeable block trades.

In all, $10.1 billion was raised through the Indonesian equity capital markets in 2010, almost four times the $2.6 billion raised in 2009, according to preliminary data published by Dealogic. This made Indonesia the second most active market in Southeast Asia after Singapore, where the value of equity issuance fell 15% from 2009 to $10.5 billion.

The largest equity deal in Indonesia last year was Bank Negara’s $1.2 billion rights issue, which included a $930 million placement of the government’s entitlement. The government owned 73.3% of Bank Negara before the rights issue, but was diluted to 60% as a result of the sale.

Similarly, the government’s 66.7% stake in Bank Mandiri will be diluted to 60% following the pending rights issue. The bank, Indonesia’s largest lender by assets, announced on December 28 that it will offer up to 2.37 billion class B common shares at a ratio of 1 new share for every 8.985 existing shares. It also set an indicated price range of Rp4,000 to Rp6,150 per rights share, which will allow it to raise between Rp9.4 trillion and Rp14.4 trillion ($1 billion to $1.6 billion).

The price represents a discount of 3.1% to 37% versus the December 23 close of Rp6,350 – the last close before the announcement. Depending on the final price, the theoretical ex-rights price (Terp) will range between Rp6,115 and Rp6,330, indicating a discount to Terp of between 2.8% and 34.6%. The Bank Negara rights issue was priced at a 16.5% discount to Terp, and the placement of the government’s portion was priced at a 9.7% premium to the rights issue price, reflecting the fact that the placement was multiple times covered.

The Mandiri placement, which will be marketed to investors through a separate roadshow and bookbuilding on January 19-21, will raise between $667 million and $1.01 billion based on the indicated price range. The deal will be priced and allocated by January 24.

The remaining 33.3% of the rights issue will be fully underwritten by the four global coordinators: Bank of America Merrill Lynch, Deutsche Bank, Danareksa Sekuritas and Mandiri Sekuritas. These four will also act as joint bookrunners for the placement and rights issue together with Citi and CLSA.

The domestic roadshow for the rights issue will last until Friday and will be followed by an international roadshow from January 10 to 18. Assuming shareholders approve the rights issue at the extraordinary general meeting on January 28, the Mandiri shares will go ex-rights on February 8. The subscription period, which also corresponds with the time investors can trade the rights in the market, will run from February 14 to 21.

Like other banks that have completed capital raisings in the past year, Mandiri will use the proceeds from the rights issue to strengthen its capital structure in order to support its loan growth and general business expansion.

Garuda, meanwhile, will use part of the capital raised from its IPO for pre-delivery payments for new aircraft while part of it will go towards the repayment of debt as per the restructuring agreed with its creditors.

According to sources, the airline will offer 36.5% of its enlarged share capital in the form of 9.36 billion shares. Of the total, 79% will be new shares, resulting in fresh capital for the company, while the remaining 21% will be existing shares sold by the government. A price range will be set before the start of the domestic roadshow on January 11. The international roadshow will kick off on January 14 and the pricing is expected to take place on January 25. The trading debut is currently scheduled for early February, sources said.

Citi and UBS are acting as international bookrunners, while Bahana Securities, Danareksa Sekuritas and Mandiri Sekuritas will handle the marketing to domestic investors.

But it isn’t just in Indonesia that the market is getting busy again. Across firms bankers are working on a variety of deals that are expected to hit the market over the next week or two, taking advantage of the short window before the Lunar New Year holiday that starts on February 4. In India there was a report yesterday that Tata Steel is looking to raise as much as $1 billion through a sale of global depositary receipts. The report wasn’t confirmed, although it seems all but certain that the company is looking to hit the market soon, whether it be through a GDR issue or some other means.

Philippine conglomerate Filinvest Development Corp will start a two-week roadshow today for a follow-on equity offering that due to a current free-float of just 7.7% will be marketed much like an IPO. The company said in a statement filed with the Philippine Stock Exchange last night that it will offer up to 2.5 billion shares, which based on yesterday’s closing price indicates a potential deal size of up to $290 million. UBS is the global coordinator for the deal and joint bookrunner together with J.P. Morgan.

And while many market participants were still on holiday, The Carlyle Group sold a portion of its shareholding in China Pacific Insurance (Group) Co last week. A deal had been widely expected on the back of the expiry on December 23 of a 12-month lockup following CPIC’s IPO, although the fact that the private equity firm chose to approach the market at a time when many investors hadn’t yet returned from their Christmas break was somewhat surprising – especially given the size of the deal.

However, the HK$6.7 billion ($864 million) transaction was conducted largely as a private placement, according to sources. Few details were available about who bought the shares, but they were said to have been distributed to a group of investors with a broad geographic spread and a fundamental view on the company. Carlyle sold 215.8 million H-shares at a fixed price of HK$31.15, which represented a modest 0.6% discount to the closing price of HK$31.35 on December 29 – the day the shares were offered to investors.

The share price gained in the two days immediately following the deal but has since retreated slightly. Yesterday it closed at HK$31.70. The sale, which was handled by UBS, saw Carlyle’s stake in CPIC fall to 12.9% from 15.4%.

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