CVC and partners raise $1.3 billion from Matahari sell-down

International investors are keen to get a piece of Indonesia’s leading department store operator, allowing the price to be fixed above the mid-point.

Private equity firm CVC Capital and the other controlling shareholders of Indonesia’s Matahari Department Store have raised Rp12.66 trillion ($1.3 billion) after pricing the fully-marketed follow-on share sale above the mid-point of the range.

The deal, which is the largest equity capital markets transaction in Indonesia since Bakrie & Brothers raised $4.4 billion from a rights issue five years ago, attracted a lot of attention and sources said over the weekend that the two-thirds of the base offering that was open to institutional investors other than the cornerstone investors was four to five times covered.

However, the demand was price sensitive and on the final day of the bookbuilding, the bookrunners told investors that the price would be fixed in the upper half of the initial range but below the top end.

The price was eventually set at Rp10,850 per share, slightly inside the top of the narrower guidance of Rp10,650 to Rp10,950. It could supposedly have been fixed at the top, but the sellers decided not to be too aggressive as they want the stock to trade well after the increase in the free-float. The bookrunners also worked hard over the weekend to try to clean up the inflation in the order book to ensure most of the shares went to investors who won’t turn around and sell them right back to the market.

At the final price the deal was said to be two to three times covered. The shares were initially offered at a price between Rp10,000 and Rp11,250.

Orders came from a broad range of investors across Asia, Europe and the US. According to one source, long-only funds accounted for about 60% of the demand, with hedge funds making up the remaining 40%. The great majority of the order amount, or close to 95%, came from international accounts. In all, more than 220 investors submitted orders.

As reported earlier, $432 million worth of shares were taken up by 15 cornerstone investors, which means they bought 33.2% of the base deal. However, some of the cornerstones, including the Government or Singapore Investment Corp (GIC) also applied for more shares through the main offering, according to sources.

The fact that GIC invested into the deal was particularly interesting since it was also one of the sellers. GIC bought into the Indonesian department store operator in connection with a leveraged buy-out in April 2010 when CVC took control of the company. The buy-out partners also included the original owners, which was a listed unit of Indonesia’s Lippo Group. Together the buyers acquired 98% at a price that valued Matahari Department Store at an enterprise value of $892 million.

Through various restructurings, the Lippo Group’s 20% stake has since been transferred to a company called Multipolar, while CVC and GIC own their shares through Asia Color — a company that is 80% owned by CVC and 20% by GIC.

After the share sale, and assuming that the 15% overallotment option is exercised in full, Asia Color’s stake will fall to 31%, Multipolar will hold 20% and the Matahari management between 1% and 1.5%. The public float will increase from 1.85% to 47.85%.

Sources say CVC and its co-owners wanted to keep their combined stake at 51% so that they can continue to seek a strategic buyer for the remaining shares. CVC and its three advisers have been looking into doing a potential trade sale for the past six months, but discussions with various interested parties didn’t pan out. And with the markets being quite strong at the moment, they decided to start the sell-down process through a capital markets transaction instead.

However, they would clearly like to find one buyer for the rest as the sale of a majority stake can typically be done at a premium to the market valuation as it will give the buyer control of the company. By comparison, a capital markets transaction to multiple investors will typically need to be priced at a discount to what is considered fair value and often also at a discount to the closest peers in order to attract investors.

The final price on the Matahari sell-down translated into a price-to-earnings ratio of 27 times, based on the consensus earnings forecasts among the syndicate banks. This compared to a marketing range of 24.9 to 28 times.

At 27 times, Matahari comes at a discount to two of its key comparables, Bangkok-listed department store operator Robinson, and Indonesian supermarket chain Alfamart, which both trade at forward P/E multiples above 30 times.

However, it did price at a premium to Indonesia’s other major department store operators, although these are viewed as secondary comps since they are smaller and focusing on a different type of customer. Ramayana, which targets the lower end of the retail market, is currently trading at about 19 times this year’s earnings, while Mita Adi Perkasa (Mapi), which focuses on the upper end of the market, is trading at 24.8 times.

The base deal comprised approximately 1.167 billion secondary shares in Matahari, which is the leading department store operator in Indonesia with about 32% of the market. The deal can be increased from the original 40% by a further 175.08 million shares through an overallotment option, which could increase the deal size to 46% of company and the total proceeds to $1.49 billion.

The sellers all participated in the transaction in proportion to the existing holdings.

Given that Matahari had a free-float of less than 2% before the sale, the deal was structured largely as an IPO with an offering document, a management roadshow and a price range. However, there was no retail tranche and international and domestic institutions were treated as one pool of demand.

Matahari currently has 116 department stores across Indonesia after opening a record 13 new outlets last year. It plans to open approximately 15 stores per year in 2013 to 2015 to keep up with the increase in disposable income and consumer spending, particularly by the middle class, according to the listing document.

It has a close strategic relationship with the leading real estate developers in Indonesia and says that it has developed a strong pipeline of potential properties to support its future growth.

Matahari, which opened its first store in 1958, focuses primarily on the middle-income segment of the market and is highly cash-generative. It also tends to lease, rather than own, its land and properties, which helps to preserve the cash.

Aside from GIC, the other cornerstones were: Azentus, BlackRock, Capital Research and Management Company, Malaysia’s Employees Provident Fund Board (EPF), Fidelity Investment, Fullerton Fund Management (a wholly-owned subsidiary of Temasek), GIC, GS Investment Strategies, Hwang Investment Management, Morgan Stanley Investment Management, Myriad, Och-Ziff, Schroder Investment Management, George Soros’s investment company Quantum Partners, and T.Rowe Price. The listing document didn’t specify how much each of them is investing.

The follow-on was arranged by CIMB, Morgan Stanley and UBS.

¬ Haymarket Media Limited. All rights reserved.
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