Re-IPO of XL Axiata could raise $552 million for parent

Indonesia's third largest mobile operator Axiata XL has started taking orders for an institutional share sale that could raise up to Rp5.049 trillion ($552 million) for its Malaysian parent company.

The sale is comprised entirely of secondary shares, but even though it won't generate any new funds for XL, it is still viewed as a re-IPO of the company since it will boost the free-float to 20% from a meagre 0.2% today. The increase in liquidity means the high-growth company, which was previously known as Excelcomindo Pratama, will for the first time become a possible investment target for international funds.

Sources say there was huge interest from investors during last week's pre-marketing from both emerging-market funds and telecom specialists and, with the price range set to pitch the company at a decent discount versus the country's number two mobile player, Indosat, much of the interest is expected to translate into actual orders. The order flow is also expected to be helped by the fact that the deal will be open to qualified institutional buyers (QIBs) in both Malaysia and Indonesia -- investor groups that aren't typically tapped for international offerings.

The timing is also seen to be right for the company to seek a broader shareholder base, while allowing Malaysia's Axiata Group to monetise part of its investment. Axiata, formerly known as TM International and the owner of Malaysia's second largest mobile operator, Celcom, currently owns 86.5% of XL. Etisalat, a telecom operator based in the United Arab Emirates, owns 13.3%.  

"In 2009, XL made tremendous progress both operationally and financially through strong execution of a focused and well-developed strategy. On the back of this momentum, and with the continued macro recovery driving capital markets, we believe that this is the right time to conduct this offering, enabling investors to participate in XL's growth story," Axiata's president and group CEO, Jamaludin Ibrahim said in a statement announcing the transaction.

The base deal will comprise approximately 1.53 billion shares and account for 18% of the share capital. The greenshoe accounts for an additional 1.8%, meaning the total deal size could be as much as 19.8% of the company. All the shares will be sold by Axiata Group.

The shares are offered in a range between Rp3,000 and Rp3,300, which translates into a 2010 enterprise value-to-Ebitda multiple of 5.1 to 5.5 and a price-to-earnings multiple for the same year of 13.4 to 13.7 times. By comparison, Indosat trades at a 2010 EV/Ebitda multiple of 5.7 and a P/E multiple of about 17.5.

Analysts argue that this is quite an attractive gap since XL is on a more favourable growth trajectory than Indosat, which has been churning out profits below expectations for the past four to six quarters. XL on the other hand has seen its Ebitda margins widen to about 45% and its Ebitda has grown at a compound annual growth rate of more than 30% over the past three years. Some observers argue that XL should even trade at a premium to Indosat.

However, despite its name and the fact that it has been catching up quite quickly operationally, XL's free-float will be only about half the size of that of Indosat, which means it is likely to be less liquid.

The offering will remain open until Friday with the price set to be fixed after the close of US trading. Goldman Sachs is the sole global coordinator and joint bookrunner together with CIMB. Indonesian investment bank Mandiri Sekuritas is a lead manager.