CVC opts for marketed sell-down in Matahari Department Store

The secondary share sale, which will essentially be a re-IPO of the Indonesian company, is expected to raise at least $1 billion.
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A Matahari department store in Bali
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<div style="text-align: left;"> A Matahari department store in Bali </div>

After trying to find one large buyer for its stake in Matahari Department Store, CVC Capital Partners has decided to monetise a portion of it through the capital markets instead.

Bankers started investor education yesterday for a secondary share sale that is expected to raise about $1 billion, although depending on the feedback and the final valuation some sources say the deal could expand to as much as $1.5 billion.

That will make it the biggest equity deal in Indonesia since Bank Mandiri raised $1.3 billion from a combined placement and rights issue in early 2011 and potentially the biggest since Bakrie & Brothers’ $4.4 billion rights issue in April 2008.

This should make it a very liquid stock and almost a must-own for international investors who want exposure to Indonesia, one source argued.

At present, however, the Indonesian company has a free-float of less than 2% and that means the share sale will be similar to an initial public offering with a couple of weeks of pre-marketing, followed by a management roadshow and bookbuilding that it expected to kick off on March 4. The shares are currently expected to be available for trading by March 22.

There will also be a prospectus and a price range and the banks working on the deal are planning to seek the support of cornerstone investors before launching the deal to the wider market. However, Indonesia, like Singapore, doesn’t require cornerstones to agree to a lock-up so their presence will be similar to that of anchor investors on other sell-downs.

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 buyout and carried out through a joint venture with MPP, in which CVC owned 80% and MPP the remaining 20%. 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.

Various reports put the value of the LBO at $770 million to $775 million.

The group has been restructured since then and CVC and the Lippo group now own their stakes through a holding company called Asia Color, which owns 98.15% of the department store operator. Government of Singapore Investment Corp (GIC) and the Matahari Department Store management also own small stakes in Asia Color.

All the shares offered through the transaction will be sold by Asia Color and according to a source, CVC, Lippo, GIC and the management will all participate in proportion to their current stakes in the holding company.

The plan is to sell about 40% of the company, which at the indicated deal size implies an equity value of between $2.5 billion and $3.75 billion and a very handsome return for CVC. However, the final portion to be put up for sale will depend on the response during the investor education, sources say.

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.

Matahari Department Store is currently quoted at a share price of Rp2,700, which implies a trailing price-to-earnings ratio of 10.2 times, although with a public float of just 1.85% the shares are rarely traded. In fact, when 7,000 shares changed hands last Friday, it was the first trade since September 12, when 1,000 shares were traded at the same price of Rp2,700.

The large size of the transaction, together with the Indonesia consumer retail theme, has attracted a lot of attention, according to sources. But a closer look at the company shows that Matahari Department Store also has a strong market position. According to its website, it currently has 116 department stores across Indonesia after opening a record 12 new stores last year and in 2011 its share of the modern department store market was about 30%.

But perhaps more importantly for investors, the company, which focuses primarily on the middle-income segment of the market, is also highly cash-generative. And in 2011, when it recorded a 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. Of the country’s other main department store operators, Ramayana focuses mainly on the lower end of the retail market, while Mita Adi Perkasa, which is known as Mapi, is targeting the upper end.

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 has earlier said that it plans to continue to open 10 to 12 new outlets per year to keep up with the increase in disposable income and consumer spending, particularly by the middle class.

In its 2011 annual report, Matahari Department Store noted that the World Bank estimates that Indonesia’s broader middle class has increased to approximately 131 million people, or 55% of the total population, from 81 million people, or 38% of total population, in 2003. “Many analysts project that this strong increase will continue, so that in the next eight years the middle class will increase to 171 million people (63% of total population),” the company said in the report.

CVC hired CIMB, Morgan Stanley and UBS in October last year to advise it on a sale of its stake in the Indonesian department store operator. The three banks have since been exploring both the possibility of a trade sale and the capital markets transaction that the private equity firm has now settled for.

Media reports have suggested that several parties, including AIG, Temasek and a partnership between Japan’s Aeon and Thailand’s Central Group, have been interested in buying some or all of CVC’s stake. It now seems nothing has come of those discussions — although it is possible that these companies will participate on a smaller scale in the share sale.

CVC has been fairly active in the Asian equity capital markets in the past couple of years. In June 2011 it took Samsonite International public through a $1.25 billion IPO in Hong Kong, and since then it has reduced its stake in the luggage specialist to just below 10% through a series of block trades.

It also planned an IPO of Formula One in Singapore in June last year, but in light of the challenging market environment it ended up reducing its stake to just over 35% through a series of private placements to Waddell & Reed, Norges Bank Investment Management and Blackrock instead. CVC was able to raise $2.1 billion from the placements.

The investment into Matahari Department Store, which still ranks as the largest foreign-led private equity investment into Indonesia, was CVC’s first direct investment into the populous Southeast Asian country. In June 2011 it added a second asset when it invested $275 million in broadband and cable-TV service provider Link Net.

Elsewhere in Asia, it also has investments in China, Hong Kong, Japan, Korea, the Philippines, Singapore and Taiwan, according to its website.

Last week a company controlled by CVC paid more than $300 million for 80% in a business process outsourcing company owned by Philippine Long Distance Telephone (PLDT).

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