Saratoga seeks growth capital through public listing

The Indonesian investment company, which owns stakes in Adaro Energy and Tower Bersama, is hoping to overcome a challenging market to raise at least $171 million from a Jakarta IPO.
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Saratoga focuses on investments in early-stage and growth-stage companies in Indonesia
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<div style="text-align: left;"> Saratoga focuses on investments in early-stage and growth-stage companies in Indonesia </div>

After completing the listing of one of its portfolio companies at the end of May, Indonesian investment company Saratoga Investama Sedaya is now trying to convince investors to support its own initial public offering.

The management met with potential investors at a lunch in Hong Kong yesterday and is hoping to wrap up its marketing in London tomorrow. The company, which is often referred to as a private equity firm, is looking to raise between Rp1.655 trillion and Rp2.116 trillion ($171 million to $219 million), which it will use to strengthen its balance sheet by repaying a $50 million loan and to make further investments, both in its existing portfolio companies and in potential new opportunities.

According to a source, the management told investors at yesterday’s lunch that the capital raised through the IPO should be enough to cover its investments for the next two to three years.

Saratoga focuses on investments in early-stage and growth-stage companies, as well as special situation opportunities, but its investment horizon tends to be longer than the typical private equity fund and as a result it also holds stakes in several companies that have now been listed for a number of years.

In the preliminary listing document, the company notes that while they are typically small in terms of absolute size, early-stage investments allow it to acquire larger stakes that give it significant influence on the business and the ability to develop company strategy and products. Ultimately, these types of investments also generate higher returns for the firm, its partners and its shareholders.

The company’s two biggest investments in terms of asset value are its 16.4% stake in coal mining company Adaro Energy and its 30.2% holding in telecom tower company Tower Bersama Infrastructure, which have been listed in Jakarta since 2008 and 2010 respectively. Together they accounted for 74% of Saratoga’s book value at the end of last year, according to a preliminary listing document.

The company also owns 28.8% of Mitra Pinasthika Mustika (MPM), a distributor of Honda motorcycles and retailers of consumer auto parts that listed in Jakarta last Wednesday after raising $150 million through an IPO. Saratoga has agreed to buy an additional 16.7% in MPM from a number of shareholders for a total of Rp1 trillion ($101 million), which will increase that stake to 45.5%. It will use about $37.2 million of the IPO proceeds towards this acquisition, while the rest will be covered by a bank loan.

Its current portfolio consists of 15 Indonesian companies, of which nine are listed.

By investing in Saratoga, investors will gain access to all of these listed companies at a discount to their market value and at the same time get exposure to its private equity portfolio, which includes a 12.3% stake in power producer Medco Power Indonesia.

When the price range was set last Wednesday in connection with the start of marketing in Jakarta, it valued Saratoga at a 0.5% to 22.2% discount to the combined net asset value of its listed portfolio companies, which at the time was around $1.7 billion, sources say. To make it simple, that calculation attaches no value to its unlisted holdings and means investors will have to judge for themselves how much they feel those assets are worth.

However, the decline in global equity markets since then has hit a couple of these companies pretty hard, which means that discount has narrowed somewhat.

Being a market newcomer, MPM has not surprisingly been a prime target of the sell-off and as of yesterday, five days after its debut, it was trading 11.3% below the IPO price. Meanwhile, Adaro has lost 11.6% since last Wednesday. Tower Bersama, which is a more defensive stock, has, however, gained 3.6%.

Another challenge is that many of the long-only funds and hedge funds that are regular investors in Asian IPOs view Saratoga as a competitor and hence are likely to sit this one out. The mix of investors so far, according to sources, include sovereign wealth funds, banks, some big family offices and other long-only investors who have money to invest in Indonesia but prefer not to cherry-pick stocks themselves.

Deutsche Bank and UBS, which are the joint bookrunners, had secured enough anchor demand to cover the base deal, but in light of the equity market sell-off, not all of them have submitted an actual order yet. Sources say the expectation is still that they will do so before the order books close tomorrow. Either way, though, the bookrunners look to have a challenging couple of days ahead of them.

The Friday before Saratoga hit the market, Mando China postponed its IPO in Hong Kong right before pricing, citing the adverse market conditions and significant market volatility that had developed during the bookbuilding. The company, which is a subsidiary of Korea’s Mando Corp and one of the leading suppliers in China of chassis-related automotive parts, had been aiming to raise between $213 million and $270 million.

Other recently listed companies, including Sinopec Engineering, Langham Hospitality Investments and Asian Pay Television Trust, are also still trading below their IPO price, making investors less keen to take their chances on another market newcomer in the short-term.

Saratoga is offering 271.297 million new shares at a price between Rp6,100 and Rp7,800 each. The deal accounts for 10% of the enlarged share capital.

There is also a 15% overallotment option, made up of all secondary shares, which could increase the total proceeds to between $197 million and $250 million if exercised in full.

Saratoga is currently 100% owned by Edwin Soeryadjaya and Sandiaga Uno, who founded the company back in 1998. They are well respected in Indonesia and also very well connected, which may come in handy in terms of overcoming the current market challenges and get the deal done.

Uno is president director of the firm, while Soeryadjaya, whose father founded Indonesian conglomerate Astra International, is president commissioner.

At the end of last year, Saratoga had consolidated total assets of about $1.33 billion, which was up 37% from a year earlier. In 2012, its consolidated net revenues more than doubled to about $244 million, while net profit increased by 151% to about $198 million.

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