Protelindo hits road for potential $514m follow-on

The sale by existing shareholders is for a stake of up to 15% in Indonesia’s largest telecom tower operator.

A group of Sarana Menara Nusantara shareholders kicked off bookbuilding late last Friday for what could be the largest equity offering in Indonesia in more than 18 months.

The shareholders, led by US hedge fund Tiger Global Management and Hong Kong-based Tybourne Capital Management, want to raise between Rp5 trillion and Rp5.6 trillion ($375 million to $422 million) by selling an initial, combined 12.3% stake in the listed infrastructure group.

Better known as Protelindo, or Professional Telekomunikasi Indonesia, Sarana Menara Nusantara owns about 14,500 telecommunication towers in Indonesia.

The base offering comprises 1.25 billion shares but could rise by a further 273 million shares worth up to $92 million if the vendors exercise a greenshoe option and increase the deal size to 15% of the company’s existing share capital.

Protelindo was listed in February 2010, so the minority stake sale is being regarded as a follow-on offering. Yet unlike most follow-ons, which are executed through an accelerated bookbuild process, the vendors have chosen to structure the deal as a fully-marketed placement.

That means the deal process will be similar to an initial public offering of shares, with an offering circular and a management roadshow, as well as an extended bookbuild period of five days that will run until Thursday.

The selling shareholders picked this method because a 15% stake could be difficult for the market to consume on an overnight basis, bankers familiar with the situation said. Making matters more challenging is the fact Protelindo is a relatively illiquid stock with a three-month daily average turnover of only 520,000 shares, implying the deal would take more than 6.5 years to digest at the normal rate.

Protelindo’s secondary share sale is huge by Indonesian standards and over four times the $120 million raised in in Indonesia year-to-date. Therefore, the deal's success hinges on whether and to what degree international investors participate, the banking sources familiar with the offering said.

As such, the deal serves as a litmus test for Indonesian equity capital markets, which has not had many internationally-marketed transactions since Sampoerna’s $1.4 billion secondary share sale in October 2015.

Credit Suisse, Morgan Stanley and UBS are leading Protelindo's share sale.

Premium pricing, discounted valuation

Unusually, Protelindo’s share sale is being pitched at a premium to market price, suggesting the vendors believe that the stock is undervalued and that they are confident of striking a deal with potential investors despite the large number of shares on offer.

The shares are being marketed with a wide pricing range, from Rp4,000 to Rp4,500, implying a premium of between 5.2% and 18.4% over Protelindo’s Rp3,800 share price close on Friday.

Indonesia is closed for business on Monday for the Islamic festival of Isra and Mi'raj.

However, Protelindo’s deal could yet be seen as a cheaper investment alternative to Tower Bersama Infrastructure, Indonesia’s second-largest telecom tower operator. That is because Protelindo would still be cheaper than Tower Bersama on an earnings basis, even if priced at the top end of price guidance. At that point, Protelindo would be valued at 17.2 times last year's earnings, while Tower Bersama is trading at 21.1 times.

On an EV/Ebitda basis the gap would be narrower, but Tower Bersama would still command a premium with a multiple of 15.1 times versus Protelindo at 14.3 times.

Entry point        

For prospective investors, a key question is perhaps whether now is a good time to enter Indonesia’s telecom tower business ahead of expected changes in the industry landscape.

As in some other developing markets, Indonesia’s telecommunications industry is set for more consolidation as the government presses for better efficiency and reduced costs for mobile users.

Indonesia currently has seven mobile carriers, after a wave of consolidation that included the merger of Bakrie Telecom and SmartFren in late 2014. But the country’s telecoms minister wants that number reduced to four by 2019, claiming that smaller operators have to step up investment or merge with bigger players.

That could hurt the telecom tower owners who make their money by leasing their towers to the mobile companies as further industry consolidation would reduce the number of potential clients and create network redundancies. It would also reduce their negotiating power because larger mobile companies are able to lease more towers and as a result can strike a harder bargain on price.

Some analysts argue that Protelindo is well-positioned for inorganic growth to overcome the potential headwinds of industry consolidation because it has a much less leveraged balance sheet than its rivals, so it has more room to acquire new towers.

The company started building up its presence last year when it bought about 2,400 towers from Axiata for $267 million in a sale-and-leaseback deal.

Protelindo recently announced that it planned to increase its net-debt-to-ebitda ratio over the medium term to 2.5-3.0 times from 1.6 times currently. It has also pledged to step up dividend payments and enhance shareholder value through share buybacks, providing further comfort to equity investors in the face of industry consolidation.

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