Telekomunikasi Indonesia (Telkom), an Indonesian telecom operator that is 53.9% owned by the government, last night raised Rp2.409 trillion ($234 million) from the sale of treasury shares — the third such deal in Indonesia and the largest so far.
As per local regulations, companies cannot sell treasury shares at a discount to their current market price and that, together with the recent weakening in the rupiah, meant it was not a trade that appealed to everyone. But Telkom’s reputation as a well-managed company and the fact that it is a stable and somewhat defensive business did attract sufficient demand both from domestic and international investors.
The bookrunners were able to upsize the deal by more than 50%, which allowed Telkom to sell all of its treasury shares that were due to expire on August 16. It does, however, hold more such shares on its balance sheet with later expiry dates. The company has agreed to a 90-day lockup before selling or issuing any more shares.
Telkom initially offered 135 million shares at a fixed price of Rp11,400, which would have allowed it to raise about $150 million. The price was equal to yesterday’s closing price and hence represented the “best case scenario” for a sale of treasury shares. Indonesian regulations stipulate that such sales much be priced at the higher of either the average purchase price, the latest closing price or the average closing price in the 90-days before the transaction.
The deal also came with an upsize option of approximately 76.29 million shares, which accounted for 56.5% of the base deal. That option was exercised in full, but only after the deal was kept open past midnight to give one US-based investor in particular time to submit an order. That final order meant the bookrunners were able to move from a partial upsize to a full one.
When the deal launched just before 6pm Hong Kong time yesterday, there was enough demand indications to cover the base deal, according to a source. Investors received a message that the deal was fully covered before 8pm.
Not surprisingly for a deal that comes at a zero percent discount, the buyers were mainly long-only investors. Hedge funds accounted for just 2% of the demand, the source said. Allocations were also kept tight with the top-five accounts receiving about 90% of the shares, indicating that there were several large orders in the book.
In all, about 20 investors participated in the transaction. The demand was said to have been split fairly evenly between domestic and international investors, perhaps with a small skew towards the latter.
The final deal size of 211.29 million shares represented about 1.1% of the total share capital and about eight days of trading.
Because of the restrictions on pricing, it is quite difficult for an Indonesian company to sell treasury shares. Typically, the issuer will have to wait for a window when the average 90-day closing price is below the latest market price so that the shares can at least be offered at a zero percent discount rather than a premium.
However, a sale allows the company to raise capital without having to go through the process of applying for an approval to issue new shares through a follow-on transaction. The alternative is to cancel the treasury shares when they expire, which will result in a reduction of the company’s balance sheet.
This particular deal came after Telkom’s share price had risen 16.9% from a low of Rp9,750 on June 25 and was up 27.4% year-to-date. However, the stock is still trading below its 2013 high of Rp12,400 that it reached at the end of May.
It gained 1.3% to Rp11,550 in the first hour of trading today, confirming the success of the transaction.
The first sale of Indonesian treasury shares was completed by Credit Suisse and Deutsche Bank on behalf of Bank Central Asia in August last year. That deal raised $74 million but was copied on a larger scale in February this year when the same seller offloaded $202 million worth of treasury shares. That deal was led on a sole basis by Credit Suisse, which seems to be carving out a niche for itself as the go-to international bank for treasury share sales in Indonesia.
The Swiss bank was also a bookrunner on this latest deal for Telkom together with three domestic firms — Bahana Securities, Danareksa Sekuritas and Mandiri Sekuritas.
To be able to sell shares in size at a zero percent discount, clearly the company will need to have sound fundamentals and it probably also helps if the stock if reasonably liquid. Telkom checks both these boxes. It also operates in a pretty stable industry that is viewed to have a limited downside and it pays a dividend of about 3.8%, based on its latest 12-month distribution.
Last year, the company posted a 17.2% year-on-year increase in net income to Rp12.9 trillion, on the back of an 8.3% rise in revenues to Rp77.1 trillion. Most of the top-line growth came from its mobile business, which contributed 39.8% to total consolidated revenues. At the end of 2012, its return on equity stood at 24.9%.