CVC-controlled Matahari Department Store launches $1.36 billion follow-on

The deal is supported by 15 cornerstone investors, who will buy up to 36% of the base offering, and was fully covered on the first day, sources say.
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One of Matahari’s 116 department stores in Indonesia (AFP) </div>
<div style="text-align: left;"> One of Matahari’s 116 department stores in Indonesia (AFP) </div>

The controlling shareholders of Matahari Department Store yesterday kicked off the bookbuilding for what could become the largest equity offering in Indonesia in almost five years.

The sellers, led by private equity firm CVC Capital Partners, are looking to raise between Rp11.67 trillion and Rp13.13 trillion ($1.2 billion to $1.36 billion) from the sale of a 40% stake in the company. The offering also comes with a 15% overallotment option that could increase the deal size to 46% of company and the total proceeds to as much as Rp15.10 trillion ($1.6 billion).

Matahari is already listed, but has a free-float of less than 2%, so even though this is technically a follow-on sale of secondary shares, it is structured largely as an IPO with an offering document, a management roadshow and a price range.

The bookrunners have also lined up 15 cornerstone investors who have committed to buy a combined $432 million worth of shares. Depending on the final price, this means they will take up between 32% and 36% of the offering. The cornerstones includes top-quality global names such as Blackrock, Malaysia’s Employees Provident Fund, Fidelity, Temasek, Government of Singapore Investment Corp (GIC), investment arms of Goldman Sachs and Morgan Stanley, Schroder, hedge fun Och-Ziff and George Soros’s investment company Quantum Partners.

Supported by this, sources say the follow-on was fully covered by lunchtime yesterday.

The investor interest was also underpinned by Matahari’s well-known brand name and strong position in the domestic retail market, as well as by the Indonesian retail consumption theme in general.

It likely also helped that the shares are being offered at a discount to the two key comparables, Bangkok-listed department store operator Robinson and Indonesian supermarket chain Alfamart, which both trade at about 33 times this year’s earnings.

Matahari is being offered at a price between Rp10,000 and Rp11,250 per share, which translates into a price-to-earnings ratio of 24.9 to 28 times for 2013, based on the consensus syndicate forecast.

It is coming 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 20 times this year’s earnings, while Mita Adi Perkasa (Mapi), which focuses on the upper end of the market, is trading at 23 times, according to a source.

The sellers are offering approximately 1.167 billion secondary shares through the base deal, plus another 175.08 million shares through the overallotment option.

There will be no retail tranche – the one key difference compared to if it had been an IPO – but rather all the shares will be marketed to institutional investors. Domestic and international accounts will be treated as one pool of demand.

The sellers are Asia Color, which owns about 73% of Matahari, and Multipolar, which owns 24.9%. The remaining 1.85% is owned by public investors. CVC currently owns about 57% of Matahari through Asia Color, while Singapore sovereign wealth fund GIC owns about 14% and management shareholders about 2% through the same vehicle.

CVC bought a majority stake in the department store operator in April 2010 from Matahari Putra Prima (MPP), a listed retail conglomerate controlled by Indonesia’s Lippo Group. The acquisition was structured as a leveraged buy-out that aside from CVC also involved GIC and MPP. The JV bought a total of 98% at a price that valued Matahari Department Store at an enterprise value of $892 million, according to a statement by CVC at the time.

Through various restructurings, the Lippo Group’s holdings have since been transferred to Multipolar, while CVC, GIC and the Matahari management own their stakes through Asia Color.

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

According to a preliminary listing document, the company has 116 department stores across Indonesia after opening a record 13 new stores last year. In 2011 it had a 31.6% share of the department store retail sector, according to data provided by Euromonitor.

The company focuses primarily on the middle-income segment of the market and is highly cash-generative. In 2011, when it recorded 16.9% growth in sales, it was recognised by CNBC as one of the top-five fastest growing companies in Asia-Pacific, according to its annual report for that year.

Key reasons for this, one source said, are a good product mix, a good choice of locations and an ability to understand the needs of its customers. It also tends to lease, rather than own, its land and properties, which helps preserve cash. The company 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.

The same source noted that there are few competitors in the mid-market segment and added that Matahari, which opened its first store in 1958, is so well-entrenched that it is not easy for a newcomer to grab market share.

However, the company itself has noted increasing competition from international retail players, especially from the US, Japan and South Korea.

Matahari does have big plans to expand though and aims 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.

The order books will remain open until March 21 and the final price will be set shortly thereafter. The follow-on is arranged by CIMB, Morgan Stanley and UBS.

The 15 cornerstones participating in the transaction are: Azentus, BlackRock, Capital Research and Management Company, 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, Quantum Partners, and T.Rowe Price. The listing document doesn’t specify how much each of them is investing.

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