Indonesian KSOs: Two down, three to go

PT Telkom announces the acquisition of Pramindo, the second KSO buyout to happen in Indonesia.

PT Telkom, the dominant telecommunications company in Indonesia has announced that it has signed an MoU to buy PT Pramindo Ikat Nusantara (Pramindo).

Pramindo is Telkom's operating partner in the domestic fixed line JV it has in Sumatra. The JV is one of five so-called KSOs which sprang up in Indonesia in 1995 as Telkom sought ways to expand its reach and coverage without incurring large capex costs. The build-operate-transfer structure of the deals meant that the capex costs would not appear on Telkom's balance sheet while the revenues it would receive would show up.

Five such KSO's were established and they all went sour in the 1997-1998 financial crisis. With revenues in rupiah and expenses in dollars the schemes very soon became economically unviable.

KSO Region 1 (Sumatra) was run by Pramindo. This was a company with an eclectic and diverse shareholding including France Telecom (40%), PT Astra (35%) and Indosat (15%) with minority investment from Marubeni, NMP Singapore and the IFC. It was to give Telkom a fixed yearly annuity until 2010, while Pramindo received any profits that would accrue on top.

Resolution of the KSO problem has been one of the main issues facing the Indonesian telecom sector for some years. This acquisition is the second such agreement after Telkom agreed to buy out KSO IV (Kalimantan) run by Cable & Wireless in May 2001. Three further KSO's are in varying states of negotiations, which bankers are hopeful will be resolved "soon".

The shareholders of Pramindo will receive $425 million, paid in 11 instalments. The first payment of $54 million will come on initial closing of the deal followed by 10 equal quarterly instalments. The shares of Pramindo are in escrow with Citibank and will be apportioned to Telkom on receipt of the quarterly payments. As such, Telkom will receive its proportional share of the cash flows of Pramindo over this period.

The valuation of the $425 million purchase price is a present valuation and is based on a discounted cash flow (DCF) analysis using an 11% interest rate and valuation comparables with other fixed line operators in Asia such as PLDT and Telecom Malaysia. It includes $86 million of debt.

The original KSO I structure essentially gave Telkom a fixed annuity from the cash flows plus some of the upside. According to bankers close to the deal, the cash flows that Telkom is already receiving from its involvement with KSO I are enough to cover its quarterly payments to Pramindo. So this deal finances itself, albeit with a slightly negative effect on Telkom's internal cash flow.

While the details of the earn out are interesting from a financier's point of view, more important is the fact that deals such as this are happening. The Indonesian telecom sector is being completely rebuilt with the aim of creating a modern, multi channel and competitive industry. The closure of this deal takes the country one step further to this goal and moves the sector away from the stasis in which it has been mired for several years.

"As with Telkom's acquisition in May 2001 of KSO Region IV (Kalimantan) from Cable & Wireless..., the signing of this MoU demonstrates Telkom's on going commitment to the continued restructuring of its KSO joint operating schemes," says Muhammad Nazif, President Director of Telkom. "We believe the acquisition of Pramindo will greatly facilitate the build out of new lines while better positioning us to maximize potential synergies with other Telkom businesses in the Sumatra region."

Jean Marie Gauthie, MD of Pramindo notes as well that "we are pleased to have reached an amicable resolution on the Sumatra KSO operation with Telkom."

As with all of Telkom's recent deals, Salomon Smith Barney was the trusted acquisition adviser. JPMorgan advised Pramindo and its shareholders.