Mixed international reception to Indonesian share sales

After a one-day delay, the share placement in Indonesia’s Bank Mandiri was priced at Rp5,250 per share, which equals a 5% premium to the price of the forthcoming rights issue and resulted in a total placement size of Rp8.3 trillion ($904 million). The placement was made up of the shares that the Indonesian government would have been able to buy in the rights issue if it had taken up its entitlement in full. However, as part of a broader plan to reduce the state ownership in the country’s flagship companies, the government chose not to buy any shares in the rights issue.

While priced extremely tight – the rights issue price has been fixed at a mere 9.7% discount to the theoretical ex-rights price (Terp) – the placement received a strong reception. According to sources, the total demand exceeded $3 billion from international investors alone. The buyers are said to include quite a few large existing shareholders who took the opportunity to increase their positions, regional Asian funds, global funds, Indonesian funds within large global funds, some hedge funds and even a couple of sovereign wealth funds.

However, 60% of the placement will be allocated to domestic investors, while international investors will have to share 40%.

The strong demand from foreign investors for Bank Mandiri was in sharp contrast to the muted interest for the initial public offering of the country’s flagship airline Garuda Indonesia, however. The airline, which in December successfully completed a five-year debt restructuring exercise, is viewed to have a lot of growth potential amid a strong and relatively resilient domestic economy and, as one of the beneficiaries of an expected consolidation of Indonesia’s fragmented airline industry, but most foreign investors baulked at the offering price.

According to a source, only about 10 international investors participated in the deal, and market talk suggested that as much as 80% of the offering will be allocated to domestic Indonesian accounts. The price was fixed yesterday at the bottom of the Rp750 to Rp1,100 indicated range and at the same time, the company also decided to sell only 4.4 billion new shares, compared with an earlier plan to sell up to 7.4 billion. However, a source said it had always been the intention of the company to raise about $350 million of fresh capital and that target will be achieved.

Contrary to speculation in the market over the past few days, Bank Mandiri decided to go ahead and sell all of its 1.97 billion shares in Garuda. Together this resulted in an IPO size of approximately Rp4.78 trillion ($520 million), of which about $360 million was new capital for the company.

The final price of Rp750 per share values Garuda at an enterprise value-to-Ebitdar multiple of 6.9 times, which is at a slight premium to the average multiple of 6.8 times among its primary peer group, which includes well-established country flagship airlines like Air China, Singapore Airlines, Thai Airways and Malaysian Airlines, as well as newer low-cost carriers like AirAsia, Tiger Airways and Jet Airways. Ebitdar refers to Ebitda adjusted to take into account the cost of leased aircraft.

The average valuation is generally pushed up by the LCCs. Garuda runs a traditional full-service airline, but also has an LCC operation to cater to the growing number of low- and middle-income travellers who are increasingly using air travel as an alternative to buses and ferries.

The aggressive pricing was believed to have been driven by the government, who didn’t want a repeat of the Krakatau Steel IPO a few months ago. The steel producer rallied sharply after the trading debut, leading to accusations that the government had sold of its assets too cheaply.

Citi and UBS were joint international bookrunners for the Garuda IPO, while Bahana Securities, Danareksa Sekuritas and Mandiri Sekuritas handled the marketing to domestic investors.

The Bank Mandiri placement and rights issue are arranged by Bank of America Merrill Lynch, Deutsche Bank, Danareksa Sekuritas and Mandiri Sekuritas as global coordinators. Citi and CLSA are joining them as joint bookrunners.

The delay in the pricing of the Mandiri placement was due to the fact that investors had difficulties confirming their orders before they had an absolute reference price. The initial orders were placed at a discount or discount range to Terp, but because Terp couldn’t be established until the actual rights issue price was fixed, the absolute price remained unknown to investors.

During the placement of the government’s portion of Bank Negara’s rights issues in November, the rights issue price was fixed before the placement closed, which allowed the bookrunners to set an absolute price range for the placement towards the end of the bookbuilding. However, in this case the bookrunners had to go back to investors and reconfirm all the orders within a range after the rights issue price was set late Monday (the bookbuilding for the placement closed early Monday morning). The final price was then confirmed yesterday evening.

However, Bank Mandiri, which will be 60% owned by the government after the placement and the rights issue, did still squeeze investors for a few extra rupiahs as the final placement price was set at Rp5,250 per share – just above the Rp5,150 to Rp5,200 price range that was indicated to investors late Monday. The final price translates into a 6.25% discount to Terp, which works out to be approximately Rp5,538 based on last Friday’s closing price of Rp5,600.

Meanwhile, the rights issue price was set at Rp5,000, or at a 9.7% discount versus Terp – one of the tightest rights issue discounts in Asia and towards the low end of the 3.1% to 37% discount the versus closing price on December 23, the last day before the deal was announced. At that time, Mandiri said the rights issue would be offered within an indicated price range of Rp4,000 to Rp6,150 per rights share. Bank Negara’s rights issue was priced at a 16.5% discount to Terp.

Still, bankers say they believe the remaining 33.3% of the Mandiri rights issue will be fully subscribed as long as the share price stays above Rp5,000. Either way, Mandiri will get its money since this portion is fully underwritten by the four global coordinators.

The country’s largest lender by assets announced on December 28 that it will offer up to 2.37 billion class B common shares at a ratio of 1 new share for every 8.985 existing shares. Together with the placement proceeds, the rights issue will raise Rp11.85 trillion ($1.3 trillion).

Shareholders still have to approve the rights issue at the extraordinary general meeting to be held on Friday on January 28. Assuming they do so, the Mandiri shares will go ex-rights on February 8. The subscription period, which also corresponds with the time investors can trade the rights in the market, will run from February 14 to 21.

Like other banks that have completed capital raisings in the past year, Mandiri will use the proceeds from the rights issue to strengthen its capital structure in order to support its loan growth and general business expansion.