XL Axiata block

Etisalat trims XL Axiata stake in $510 million block trade

The heavily anchored deal will increase the free-float in the Indonesian mobile operator to just under 30%.
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Prisms by Axiata: a sculpture outside the company's Kuala Lumpur office
<div style="text-align: left;"> Prisms by Axiata: a sculpture outside the company's Kuala Lumpur office </div>

Emirates Telecommunications (Etisalat) has sold about two-thirds of its holdings in Indonesian mobile operator XL Axiata through a block trade, raising Rp4.88 trillion ($510 million).

The transaction, which launched after the close on Wednesday and priced early the following morning Hong Kong time, was almost the same size as the company’s re-IPO in March 2010 and will boost the free-float by about 45% to just under 30%.

That may partially explain the strong interest in the deal, with sources saying that the total demand exceeded $1 billion and was of very high quality. The price was fixed at the top of the indicated range and in a further indication of the investor enthusiasm the stock actually finished above the pre-deal close yesterday.

XL Axiata is the third-largest mobile operator in Indonesia behind Telekomunikasi Indonesia (Telkom) and Indosat by number of subscribers, and the second-largest by revenue, but is trading at a premium thanks to its greater growth. The stock is very illiquid though, which has made it difficult for investors to accumulate a meaningful exposure in the market. The re-IPO two-and-a-half years ago (essentially a secondary share sale by its parent company, Malaysia’s Axiata Group) increased the free-float to about 20% from just 0.2%, but even so, the turnover in the stock is still only $1 million to $2 million a day as many of the shareholders are of the buy-and-hold kind.

This means that the block trade accounted for at least 250 days of trading. In a reflection of that, and the 53% gain in the share price since mid-March, the shares were offered at a discount of 6% to 9% against Wednesday’s closing price of Rp6,700.

But joint bookrunners J.P. Morgan and Morgan Stanley also played it relatively safe by signing up six anchor investors, who agreed to take up more than 75% of the deal before the launch. The anchors were described as top-tier global long-only investors with big positions in the telecom sector. The incremental demand was also led by international names, but included Jakarta-based funds as well. Overall, more than 80 investors took part in the transaction and 80% of the deal was placed with the top-10 accounts.

A market participant not involved in the deal said that a 9% discount was a good starting point to make investors look at the deal, but given the continuing interest in Indonesia in general and Indonesian consumption-related stocks in particular, one could expect the price to be tightened from there.

And that is exactly what happened. According to a source, there was some price sensitivity in the order book when the deal closed at 9pm Hong Kong time, but the seller asked the bookrunners to try to remove that, which they were able to do. However, it meant the pricing was delayed until early yesterday morning as they had to go back and reconfirm with investors. The price was eventually fixed at the top of the Rp6,100 to Rp6,300 range for a discount of 6%.

Etisalat sold 775 million shares, which translated into 9.1% of the share capital. The United Arab Emirates-based telecom operator will see its stake drop to 4.2% from 13.3% as a result of this deal, but will remain the second-largest shareholder in XL Axiata behind Axiata Group. Its remaining shares will be locked up for 90 days.

Before the placement, the share price had just about doubled since the re-IPO, which was done at a price of Rp3,300. And having bought the shares before that, Etisalat was sitting on very healthy returns, making this as good a time as any to sell. Based on Wednesday’s closing price, XL Axiata was trading at a 2012 enterprise value-to-Ebitda (EV/Ebitda) multiple of about 6.9 times, compared to an average of five times for the Indonesian telecom sector as a whole, one of the sources said. And even at a 6% discount, the shares were sold at a premium to comps.

Etisalat has identified its XL Axiata investment as a non-core holding, so the sale didn’t come as a total surprise. Indeed, sources said J.P. Morgan and Morgan Stanley were mandated for a deal in 2011.

The re-IPO in 2010 accounted for 19.8% of the share capital (including the greenshoe) and raised $607 million. All the shares were sold by Axiata Group, which saw its stake drop to 66.6%. The deal, which was led by CIMB and Goldman Sachs, was three to four times covered, attracted 250-300 investors and priced at the top of the marketing range.

XL Axiata’s share price held above the placement price throughout the day yesterday, and in the final hour even pushed above the pre-deal close. It finished the day 0.8% higher at Rp6,750. This means the stock is up 49% year-to-date, compared with a 9.1% gain in the Jakarta Composite index.

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