Bayan Resources IPO draws strong demand

The Indonesian coal producer attracts more than $1.8 billion in orders despite a sharp downturn for most of its sector peers, but is forced to price its $529 million deal towards the low end.
IndonesiaÆs eighth largest thermal coal producer Bayan Resources has raised Rp4.83 trillion ($529 million) from the countryÆs largest private sector IPO marketed to international investors, proving wrong the sceptics who doubted that a deal this size could get done in the current market environment.

Bayan did face its fair share of challenges though, as tumbling oil prices sent the share prices of rival Indonesian coal companies sharply lower during the roadshow, which lasted just over two weeks. However, sole bookrunner Merrill Lynch had deliberately set a wide price range to allow room for a volatile market and thanks to that, the company was able to price at a sufficient discount to Bumi Resources even though that stock fell 21% during marketing.

The final price was set after the close of New York trading on Wednesday at Rp5,800, or close to the low end of the Rp5,600 to Rp7,700 range. This translates into a 2009 price-to-earnings ratio of 7.3 times and gives a discount of about 14% versus Bumi. According to sources, the demand was strong enough that the deal could have priced higher, but this would have made no sense on a relative basis.

ôThis deal had to come at a 10%-15% discount to Bumi, which is four times the size of Bayan and the biggest coal producer in Indonesia. Even though the demand was there, it would have been silly to sell it at the same level,ö one source says.

Indeed, many investors didnÆt provide absolute price limits for this deal, but rather set the maximum they were prepared to pay in relation to BumiÆs share price. The total demand for the international portion of the deal was said to have reached $1.8 billion to $1.9 billion (largely un-inflated), or at least 3.4 times the size of the base deal, with long-only funds accounting for more than 90%. In all, the deal attracted more than 80 institutional investors, with about 55% of the demand coming from Asia, 30% from Europe and 15% from the US.

Eighty percent of the deal went to offshore accounts, while 20% was allocated to onshore domestic institutions and retail investors. Local firm PT Trimegah Securities was in change, arranging the domestic offering and acting as a joint lead on the overall deal.

The IPO was supported by Italian power producer Enel, which aside from being one of BayanÆs largest customers, also came in as a cornerstone investor. Investors attending some of the roadshow meetings were told that Enel bought more than $200 million worth of shares, or at least 37% of the base deal size. The Italian company has also signed a multi-year off-take agreement and will be given one seat on BayanÆs board. The offering was also said to have included one or two more large-size anchor orders.

Aside from the fact that there have been few other Asian deals to choose from over the past three weeks û since the beginning of July, only two Asian IPOs have priced, while two others have been pulled û investors do still generally like coal as a sector. True, the fall in benchmark oil prices to around $125 a barrel from the record high above $147 on July 11 has made coal slightly less attractive from a relative point of view as evidenced by the fact that other coal producers had lost up to a quarter of their record values in late June. One example is newcomer Indika Energy, which gained 21% in the first three weeks after its June 11 trading debut, but has since given up all of that and on Wednesday closed 5.9% below its IPO price. However, there is still huge demand for thermal coal from power plants around the world and many investors remain underweight this commodity.

Looking specifically at Bayan, investors liked the company because of the high quality of its coal, large reserves and stellar management team. Because of its small size (in terms of current output), it is also expected to be one the fastest growing coal producers in Indonesia in the near future with a plan to increase its annual production volumes to close to 8 million tonnes this year from 4.7 million tonnes in 2007, and to about 13 million tonnes in 2009. Bayan also has a more developed infrastructure than many of its competitors to support the mining operations, including its own coal terminal and floating transfer station, which allows for efficient and low-cost blending and loading of its coal onto bulk ships.

The company sold 25% of its enlarged share capital in the form of 833.3 million shares. About 40% of the total, or 333.3 million shares were new, while the remaining 500 million were sold by the three founding shareholders who, prior to the offering, owned 100% of the company. According to a source, the company decided not to use an option to sell additional secondary shares, which could have expanded the deal by up to 10%. This option was separate from the greenshoe, which the bookrunner can still choose to exercise within 30 days of the trading debut.

The stock is scheduled to start trading on or around August 12.

Bayan is the largest Indonesian IPO this year aside from fellow coal miner Adaro Indonesia, which raised Rp12.25 trillion ($1.3 billion) from an offering in June. However, about 85% of that deal went to a group of pre-IPO investors, including Government of Singapore Investment Corp (GIC), Goldman Sachs, Citi and Farallon, as part of a group restructuring. Of the remaining portion, the majority was said to have gone to domestic accounts, including offshore Indonesian institutions, with only a small number of shares allocated to international investors.

However, there was no shortage of demand and the shares surged 57% to Rp1,730 on their July 16 debut. Despite the pressure on the rest of the sector, Adaro has retained most of those gains over the past week, closing yesterday at Rp1,630, or 48% above the Rp1,100 IPO price. As a result, it is now trading at a 2009 P/E ratio of about 11.5 times, compared with an IPO valuation of 7.8 times.

Adaro Energy is the holding company of IndonesiaÆs second largest coal producer Adaro Indonesia, which is in the process of doubling its current production capacity of 40 million tonnes per year to 80 million tonnes over the next five years. Local investment bank Danatama Makmur was the sole bookrunner for the IPO, while DBS, Morgan Stanley and UBS acted only as international placement agents and were not involved in the marketing or bookbuilding of the deal.

¬ Haymarket Media Limited. All rights reserved.
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