Indonesia's dominant cellular operator announced plans yesterday for two international bond issues and an important piece of M&A, which will see strategic investor SingTel increase its stake in the company from 22% to 35%.
Somewhat bizarely officials said that JPMorgan has been mandated for a $100 million to $150 million five-year bond issue for the parent, PT Telkom, while UBS Warburg will lead a $100 million deal for cash cow, PT Telkomsel. Few knew that Telkomsel was planning a bond deal alongside Telkom and some wonder whether the two will cannibalise each other.
However, local experts say that it makes sense for the overall company to let Telkomsel raise its own funds for capex rather than downstream the funds from the parent which will undoubtedly have to pay slightly more.
Observers also have mixed views of how the UBS Warburg deal will fare once it begins presentations on Monday. Because the company has no dollar earnings, some argue that investors will demand extremely strict covenants for fear of the currency risk the company is taking on board. Others say that Telkomsel has a slight natural hedge since its equipment purchases are in US dollars.
It is also true that the rupiah is currently at such a weak level relative to pre-crisis days, that it is unlikley to fall by similar extent again. As one specialist comments. "The currency would have to fall a very long way from where it currently is before the Telkom's strong cash flows and ability to service its debt were compromised by significant currency depreciation."
More M&A from the Lion City
SingTel also announced yesterday that it has paid PT Telkom $429 million for the 13% increase in its stake. PT Telkom still owns the remaining 65% of Telkomsel and as part of the transaction will complete the integration of its DCS 1800 wireless business. Put simply, the integration of this license with its massive spectrum gives Telkomsel a complete dual band national network, and one which can deal with peak time demand in Jakarta (rather than frustrating customers with drop-out and busy signals).
Given its massive spectrum and quality advantage it is no surprise that Telkomsel has increased its market share over the past year from 46% to 50%, and grew its subscribers by 92.8% from 1.6 million to 3.25 million. That makes Telkomsel one of the fastest growing telcos in Asia outside China - in one of the fastest growing markets. An important consideration when viewing the sheer dominance of Telkomsel's existing position, is how unlikely it is to dwindle in the medium term - that's because Indonesia does not have number portability, which means there is a big disincentive to change networks.
Little wonder, SingTel sees this as a good investment. Its president and CEO, Lee Hsien Yang says SingTel wishes "to take full advantage of the high growth mobile business in this region and we will collaborate with one another in areas of engineering, product development and marketing."
Telkomsel thinks it will benefit from SingTel's partners around the region, in terms of gaining better roaming agreements and enjoying a large share of roaming revenues.
Win win in Jakarta
Telkomsel last year had a net income of $199 million on $479 million of revenues; and on total assets of $727 million. Unlike most telcos, it is sitting on cash ($62 million); although its pending debt issue will introduce some gearing..
SingTel's acquisition values the company at $3.3 billion today. That is around $600 million more than the value it ascribed when it bought its original 22% stake late last year, and shows how much value has been created by the management and by the growth of the market - where penetration is still only 3%.
With a pending IPO, SingTel was keen to make sure it raised its stake so that its 22% stake wasn't diluted below 20% - the crucial level for equity accounting. But it also sees Telkomsel as a massive growth opportunity and a good place to put its capital.
SingTel currently has two commissioners out of six sitting on the company's Board of Commissioners, and one out of five on the Board of Directors. While it is not being disclosed, both these numbers will rise. "There will be a perception," said one banker, "that SingTel is now playing a much larger role in the company."
This should definitely help when Telkomsel goes to the bond markets next week. Pricing of Telkomsel's debut bond should definitely benefit from SingTel's presence, given it is one of Asia's most respected capital markets names.
Telkomsel wants funds to expand. It is looking to spend $500 million on network equipment, in order to further expand its subscriber base to 5.2 million.
Telkom was advised on the sale by its house bank, Salomon Smith Barney, while Goldman Sachs advised SingTel.
"This puts Telkom and Telkomsel in a position to increase their dominance in the Indonesian market," says David Putnam, a director in Salomon's M&A team. "It gives them a platform to do an IPO for Telkomsel at the appropriate time and positions Telkomsel to access both capital and expertise."
PT Telkom needs to sell stakes in its crown jewel in order to fund capex and combat Indonesia's very low teledensity - a major government priority. Some cash will also be required to buy out foreign telcos that participated in landline joint ventures (known as KSOs) that were formed around Indonesia in the Suharto era.
More good news, it appears
Meanwhile, in another bright piece of news, Minister for State Enterprizes, Laksamana Sukardi says he has patched up relations with Indosat's trade unions - which were previously threatening to strike if the government went ahead with selling majority control.
The government plans to sell up to 45% of Indosat in two stages, the first being in June, via a 15% equity offering. The remaining 30% will probably be sold to a strategic investor. The government hopes to raise around $450 million to help plug the budget defecit.