Mandiri toasts full glass

Government underlines privatization intent with the successful delivery of an IPO for Bank Mandiri.

Joint lead managers ABN Amro Rothschild, Credit Suisse First Boston and Danareksa Sekuritas closed the institutional books on a four billion share offering for PT Bank Mandiri last night (Monday), pricing the deal just off the top of its indicative range.

From the government's point of view the country's largest IPO since 1996 is likely to be viewed as a great success. It has not only met its stated objective of securing pricing the deal above book value, but been able to increase it back towards the divestment size it had originally envisaged. Most importantly of all, by leaving a little money on the table for investors, the government has done its best to ensure a solid secondary market debut and stable platform from which to launch more deals on its privatization agenda.

In turn, Mandiri and its three lead managers appear to have delivered a deal, which satisfies investors' desire for yield and growth, with the comfort of strong momentum propelling the whole market forwards.

Observers report that the overall book closed 8.5 times covered, with a higher ratio of international to Indonesian accounts. On a base deal size of 2.869 billion shares and issue price of Rp675, the government will net proceeds of $235 million.

However, there are also two overallotment options: a greenshoe for a further 431 million shares and red shoe of 700 million shares. The latter refers to the domestic retail overallotment option. The exercise of both options could potentially lift proceeds to $328 million and will see the government's stake drop to 80%.

Pending the completion of the retail offering, which runs between July 2 and 4, about two thirds of the deal is expected to be placed offshore and one-third onshore. Observers say a total of 250 accounts participated of which about 20% placed orders for more than 10% of the deal and about 30% to 40% were either new to Indonesia, or returning for the first time since the Asian crisis.

By geography, the international book had a split of roughly 30% Asia, 35% Europe and 35% US. By investor type, no one particular kind of account is said to have dominated. Given the deal's wide-ranging appeal, it is said to have attracted a mixture of hedge funds, global growth funds, value funds and NJA specialists.

The attraction is obvious given the deal's generous dividend yield and investors' perception of the underlying market's growth prospects. Based on a dividend yield of 14.2%, Bank Mandiri will rank as Asia's highest yielding bank. It has promised an FY03 pay-out ratio of 50% and although the bank has not committed to further dividends, it has said it will continue to maintain some form of dividend unless it suffers liquidity or capital problems.

Against the bank's nearest comparable, pricing has also come in line with expectations. From the outset, investors demanded a discount to Bank Central Asia (BCA) and got a 20% one. At the time of pricing, BCA was trading at Rp2,900 per share, representing a price to 2002 book multiple of 1.4 times.

BCA has long been favoured by analysts because of its dominant retail franchise and strong ratios (by Indonesian standards). But many expect that Mandiri's sheer size (its asset base is twice the size of BCA) and national prominence will steadily erode the differential to the extent that it trades through BCA over time.

However, few would doubt that market momentum has also played a huge role in the deal's ultimate success. Prior to pre-marketing the leads took an understandably cautious approach and successfully negotiated down the issue size from 30% to 10%, arguing that a large deal would be difficult to absorb in a market, which only trades up to $50 million per day.

During early pre-marketing, investors are also said to have been fairly price sensitive and it was only when the deal gained clear momentum that pricing could be bought in towards the top end of the Rp563 to Rp688 range. Against this backdrop, the Jakarta Composite Index is up 19.29% so far this year and in dollar terms an even more impressive 30%.

In this context, the flotation of the country's largest bank would seem the ideal investment vehicle for investors seeking interesting ideas, the means of accessing stock in sizeable chunks, or tracking the country's macro-economic growth prospects.

On a fundamentals basis, Mandiri is often likened to a bond fund rather than a bank, since its asset base is still dominated by government re-capitalization bonds (just under 60%). While this means that a small loan portfolio keeps NPL levels relatively low too, it makes rapid asset growth more problematic.

During roadshows, management are said to have told investors that the bank intends to maintain a CAGR (Compound Annual Growth Rate) of 20% and bankers say investors appear willing to give them the benefit of the doubt.

Mandiri's IPO represents almost one week's trading volume on the Jakarta Stock Exchange and conscious that it could easily swamp the market, the government seems to have been sensitive towards achieving some form of pricing balance. Because it ultimately wants to divest majority control of the bank, it opted to increase the deal size rather than the price range. Yet at the same time, it left the top 10% of the indicative range on the table and bankers have applauded the clear-sightedness of maintaining momentum in the privatization programme.

The next step will be the retail offering, followed by listing on July 14. Many hope that Mandiri's success will now lift the whole market and spur even greater gains.