Christmas comes early for Indonesia

The sale of the government''s 42% stake Indosat raises a windfall of $631 million.

They were dancing in the corridors of power in Jakarta at the weekend after the hugely successful privatization of the government's 42% stake in PT Indosat. Singapore Technologies Telemedia (STT) agreed to pay Rp12,950 a share, a 51% premium to Friday's closing price of Indosat stock.

In what has to be one of the cleanest privatization exercises the Indonesian government has ever conducted, STT beat out its only other rival bidder, Telekom Malaysia when final bids were submitted at 5pm on Friday. With the proceeds of this transaction, the Indonesian government will actually meet its privatisation target for the year, the first time this has ever happened.

The privatization process began on August 22 when the government put adverts in global papers asking for interested parties to submit bids. Some 14 investor groups pre-qualified and were invited to meet the management in the week beginning October 14.

However, the weekend before those meetings were scheduled to take place, terrorists exploded the massive bomb in Bali and it looked as if the deal could well be off. Yet to everyone's surprise, of the 14 pre-qualified bidders, 13 still made the meetings.

The process moved on swiftly from there. Preliminary bids were due on November 7 after which four bidders were short-listed. These were: Desa Mahur, the investment company of Ananda Krishnan and parent of Maxis, the Malaysian mobile company; an investor group led by Gilbert Global including Astratel and Essar; Telekom Malaysia; and STT.

Of these four, two made the final bids and STT was chosen. According to the bankers at CSFB - who were advising the government - STT's bid was chosen purely on the basis of price. Indeed, to ensure maximum transparency, the final meeting at 5pm last Friday was attended by representatives of both bidding companies, the Secretary General of the Ministry of Finance, the Director General of the Ministry of Posts and Telecommunications, and the Chief Representative of the IMF in Indonesia.

Once the winning bidder was announced, the government and its advisers, and STT and its advisers, Goldman Sachs, worked feverishly through the weekend to sign three contracts at 7.30am on Sunday morning. These were the sale and purchase agreement, the shareholders agreement and the escrow agreement

This was the third attempt by the government to sell Indosat after aborted efforts in 1998 and 2000. What made this time different was the wholesale reworking of the Indonesian telecom sector in 2001 and 2002.

In particular for Indosat, the acquisition of Satelindo - the second mobile operator in the country - in 2001 created an integrated phone company with local, international and mobile businesses. This gave it a profile of steady underlying cash flows with high growth potential; facets reflected in the price that STT is paying for its stake.

Furthermore the buyout by Indosat of Deutsche Telekom's stake in Satelindo in May this year, paved the way for a much clearer shareholder structure with little stock overhang. The government still retains a 15% stake in Indosat, which in the short term it is unlikely to divest. However sources close to the government confirm that further budgetary constraints, if they arise, could reverse that situation.

At Rp12,950 a share, STT is paying slightly less than a 51% premium to acquire 42% and control of the company. On an EV/EBITDA basis, it values Indosat at 5.2 times 2002 earnings, and 4.3 times 2003 forecast earnings. This is very much in line with regional peers such as AIS and TAC in Thailand and Globe in the Philippines, despite the fact that Indonesia has a much higher discount rate for future cash flow valuations.

Moreover, with net debt of around $600 million as of September, Indosat now has a debt to EBITDA ratio of 2.1, which is comparable to single A rated credits such as SingTel and Telstra. Sources close to Indosat deny rumours that the company needs new equity and rumours of a forthcoming placement of new shares are said to be off the mark.

What is clearly of interest is the presence of STT. This is the company that competes head on with Singapore Telecom in its home market. Singapore Telecom is also the majority (35%) owner of Indosat's main mobile rival, PT Telkomsel, the unlisted but biggest mobile operator in Indonesia. The Singapore government through the ownership of Temasek Holdings also effectively controls both STT and Singapore Telecommunications.

It is going to be very interesting to see what effect this rather cosy relationship will have on the competition between Indosat and Telkomsel. It will probably be very good for shareholders of all the companies involved, although Indonesian telecom consumers might not get the best deals going.

But in the meantime, all participants are focusing on growth in the overall telecom market. In the mobile arena in particular there is huge scope for growth. With 3% of the 210 million population actually using mobile phones, the prospects for new business are very exciting. So exciting that it warrants a 51% premium.

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