Farallon Capital Management sold its entire 4% stake in Indonesia's Bank Central Asia on Thursday, raising Rp3.37 trillion ($329 million). By clearing its stake in the bank, the US-based hedge fund manager is making a big profit on the initial investment it made in 2002.
A total of 986 million shares were on offer at a price between Rp3,425 and Rp3,650, representing a discount of between 4.6% and 10.5% to Thursday's closing price of Rp3,825. The deal priced at the bottom, giving the full 10.5% discount. On Friday, the share price dropped by 7.2%.
The deal, which was arranged by Credit Suisse, took place amid a flurry of other transactions on Thursday night. In Korea, Daewoo International completed a $300 million convertible bond and Doosan Heavy Industries and Construction raised $154 million from a placement of treasury shares. Hong Kong property developer Chinese Estates was also in the market trying to raise at least $200 million, although that deal was eventually cancelled.
The order book for Bank Central Asia was described by one source as "comfortably" covered. The shares on offer were bought by 40 investors. Most of these were long-only institutions, but there were also some high-net-worth investors in the mix. Much of the demand came from Asia, but the company recently held meetings in London and New York with potential investors, which resulted in some orders from the US and Europe.
Farallon will have made a handsome profit. It bought into Bank Central Asia in 2002 when shares in the bank were trading at a range of between Rp400 and Rp600. In the past month, the share price has been above Rp3,500.
The seller may have chosen a good time to offload its stake. Earlier this month, Royal Bank of Scotland (RBS), reiterated its "hold" rating on Bank Central Asia in a research note, and gave it a target price of Rp3,700, only slightly higher than Thursday's placement price.
The main problem facing Bank Central Asia is falling interest rates that will eat into the bank's net interest margin. Indonesia's benchmark interest rate is currently 7.25%, and RBS expects it to decline further to 6.5% in 2010.
"Whereas we expect most Indonesian banks to show accelerating earnings progression through to 2010, we expect [Bank Central Asia] to buck the trend and show decelerating earnings progression," RBS said in the note. It expects net profit growth of 8.5% this year and 6.6% next year.
More generally, some observers are becoming bullish on the Indonesian economy. Morgan Stanley, in a report released last week, asked whether positive factors in the economy may warrant putting another "I" in BRIC, adding Indonesia to the leading emerging markets countries of Brazil, Russia, India and China. It cited the coming together of a number of key factors: a structural decline in the cost of capital, and recent policy and political changes, combined with Indonesia's natural resources reserves.
Morgan Stanley's medium term outlook for Indonesia is bullish. "In our view, improved politics, policy measures to encourage private sector participation with the structural decline in capital costs will inevitably draw out the entrepreneurial ability in the private sector, pushing the economy towards its potential 6% to 7% growth level from 2011," it said in the report.