Indosat privatization mandated

Credit Suisse First Boston wins the government divestment.

In a move that will surprise few, competitor banks report that Danareksa has selected CSFB to join it as lead manager for a first follow-on offering in Indosat shares. Banks which had been hoping to see a second global co-ordinator appointed, are likely to be disappointed. However, CSFB has had a long and close association with the telecom operator and its sole appointment marks a logical step now that the government seems likely to sell most of its remaining 65% stake to a strategic investor rather than through the public markets.

Timing and size of a deal still remain unclear given the large number of issues to be resolved. Local observers report that the government has yet to decide whether to sell part or all of its stake upfront and how to split either sale between a strategic placement and public offering.

Once this has been decided, the issue of Deutsche Telkom's 25% stake in Indosat's 75% owned cellular operator Satelindo needs to be resolved. Telecoms experts say that the government will not be able to sell a strategic stake in Indosat without a full shareholders agreement. As Deutsche Telkom wants to sell out of Satelindo, however, this is unlikely to be forthcoming since a strategic sale in the parent will compromise the sale of its own stake in the subsidiary, for which JPMorgan is acting as M&A advisor.

Satelindo management are also likely to be worried that difficulties resolving the issue and indeed finding a foreign operator with the cash and willingness to purchase a strategic stake will drag on all year and impede its own IPO plans. Having mandated JPMorgan and Lehman Brothers for a $200 million to $300 million offering, the company is said to be keen to get to market as quickly as it can.

This is because it needs to raise about $75 million to $100 million to lift debt covenants constraining it from spending any more than $50 million in capex. The company spent 2001 pushing hard for market share, but the resulting increase in subscribers (68% year-on-year) has put pressure on its existing network.

Local analysts also say that Indosat also needs to decide whether to merge Satelindo with IM3, its second cellular operator which began rolling out a GSM1800 service last year alongside Satelindo's GSM900. Unlike Telkom, which merged its two operators to offer a dual band service, Satelindo is said to have kept them separate because it believed that with 30 MHZ of spectrum, the government might demand some back.

The government is also aware that if Satelindo lists ahead of a new public offering in Indosat, it may face fresh difficulties as the former accounts for 80% of the latter's NAV. As BNP Paribas Peregrine analyst Manog Nanwani explains, "If Satelindo goes first, investors will be less keen to buy Indosat. They'll only want to buy the parent if it's trading at a much lower valuation than the subsidiary."

The backdrop to both sales remains positive, however. Year-to-date, Indonesia ranks as Asia's second best performing market, trading up 17.2%.

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