The drawn-out saga of KSO III is tantalisingly close to resolution. PT Telkom has agreed in principal to buy out AriaWest from its West Java KSO III operations. The deal brings to an end nearly two years of tortured negotiations that had already gone to legal proceedings at the ICC courts in Geneva.
Under the terms of the deal, Telkom will pay $64.5 million in cash and $120 million in 11 semi-annual installments over the next five-and-a-half years. Telkom has also agreed in principle to assume AriaWest's $270 million debt but it is still negotiating with the banks for some restructuring of that debt load.
"We are not asking for a lot," says Greg Mazur, co-head of telecoms investment banking at Salomon Smith Barney and Telkom's adviser on the deal. "But if the banks do not give something, this deal could still blow up."
Negotiations with AriaWest started in September 2000 when the government ended Telkom's monopoly rights. IMF conditions also necessitated this deal along with the resolving of the other five KSO's in Indonesia.
Initially, negotiations went horribly as the management of both companies refused to budge. Legal suits were filed and the whole deal was heading towards the creek at a rate of knots. But in December 2001 the shareholders of Ariawest, Mediaone International (part of AT&T Wireless), the Asian Infrastructure Fund and PT Aria Infotek took over the negotiations from AriaWest's management which the shareholders removed.
"It has been very very difficult to negotiate this," concedes Mazur. "The turning point came in December 2001 when AriaWest's shareholders got rid of the company's management."
The deal struck sees Telkom taking over management of the KSO immediately. The captured cashflows from existing operations are enough to cover the installment payments thus making this a partly self financing deal.
By paying $184.5 million and assuming the $270 million in debt, the total value of AriaWest can be seen to be $454.5 million. Telkom discounted this by a conservative 12%-13% to arrive at a present value of around $415 million.
The deal also gives Telkom a tax loss carry forward of $52 million as well as cash on AriaWest's books of $20 million. Discounting both those sums, leaves the core value of around $340 million, which is a higher value based on multiples of fixed lines and cash flow than Telkom's previous KSO buy outs.
However, Telkom is keen to point out that it expects AriaWest's profits to grow much faster than its previous two purchases. This is because during the legal wranglings of the last two years there has been zero growth in KSO III. Telkom believes that with a little investment, 100,000 new fixed lines can be connected on top of the 650,000 existing lines. And the company feels that after such a long period of underinvestment, there should be pent up demand for a lot more than 100,000 new lines.
Furthermore with the $1.3 billion lawsuit now removed, a big risk has been mitigated, which Telkom also feels warrants a higher price.
But more than the price, the structure of the deal looks entirely advantageous to Telkom. Winning full management control on day one but with a five-and-half year buyout, shows how keen the AriaWest shareholders had been to resolve the issue. "This was as far from being strategically valuable for AT&T Wireless as you could imagine," says Mazur. "It was essentially a stranded asset in AT&T Wireless's book."
There are now only two more KSO's to be resolved, KSO IV in Central Java and KSO VII in Eastern Indonesia. According to Telkom management both of these will be tackled in 2003. A shareholders meeting will be convened on June 14 to approve the AriaWest deal along with the recent Pramindo purchase and the Telkom share sale to SingTel. As Telkom is majority government owned, this meeting will rubber stamp all three deals. (See related articles below)
Telkom is also in the process of raisng finance through two bond deals. The first is a Rp1 trillion ($100 million) local bond arranged by Citigroup and Danareksa. A further $150 million is going to be raised through an international bond under the lead management of JPMorgan.
