Philip Morris International, the world's largest tobacco maker, has seen the value of its investment in Indonesian cigarette maker PT Hanjaya Mandala Sampoerna rise more than three-fold in 10 years after completing a partial stake sale on Thursday.
New York-listed Philip Morris raised Rp20.3 trillion ($1.4 billion) through the sale of roughly 5.7% of Sampoerna’s enlarged share capital in a rights issue-cum-secondary share placement. The final price was set at the top end of the Rs65,000 to Rs77,000 marketed range.
Philip Morris took over Sampoerna in 2005 through a tender offer for a total consideration of $5.2 billion, or Rp10,600 per share, in one of Indonesia’s largest foreign direct investment transactions. At that time a 5.7% stake in the company was worth approximately $296 million.
The fact that the same stake was sold at $1.4 billion means Philip Morris has made a return of 373% on an absolute basis, equating to an annualized return of 37.3%.
At the final price Sampoerna is valued at 29.0 times consensus 2016 earnings and 33.2 times 2015 earnings. It also implies a dividend yield of 3.4% for the 2016 financial year.
Completing the deal was not an easy task. The benchmark Jakarta Composite dropped as much as 6.3% since Sampoerna started bookbuild on September 21. Two days before book close, the Indonesia stock exchange sent a negative signal to the market by confirming a cut in the daily transaction target, citing falling index and volatile market conditions.
Indonesia’s leading tobacco manufacturer was however able to sail through with the support of nine anchor investors, which agreed to take up 45% of the deal at the top price before the book opened.
“These anchor investors were given full allocation because they have agreed to buy at Rs77,000 before launch,” a source familiar with the situation said. “That gave Philip Morris confidence to push the deal forward.”
At the end the book was well-oversubscribed across the range, the source said, with allocation skewed particularly towards domestic and international long-only investors. The top 10 investors were allocated about two-thirds of all shares on offer, while allocation to hedge funds were minimal.
Good investment
The price tag is the first indication of how much the US tobacco company has earned from its mammoth investment in the local unit 10 years ago.
By comparison, Sampoerna’s net profit has been growing at a slower annual rate of 22.6%. The deal suggests the return on investment in Sampoerna has also outpaced the Jakarta Composite, which offered a 29% annualized return in the same period.
Nonetheless, Philip Morris’ actual return might have been much smaller since the Indonesia Rupiah has depreciated by about 45% since the Sampoerna buyout.
Proceeds from the stake sale will increase the parent's cash holdings by 76.5% to $3.2 billion, and boost its working capital ratio to 1.0 times from 0.9 times.
The transaction was borne out of regulatory compliance reasons because Sampoerna was not able to fulfill the Indonesia exchange’s minimum 7.5% free float requirement. Philip Morris held 98.2% of the company before the deal, implying a free float of only 1.8%.
It was expected that the deal will create a meaningful liquidity pool for Indonesia’s largest company by market capitalization, whose three-month daily average volume was only 20,000 shares.
However, sources were doubtful over how much of the new $1.4 billion liquidity will be actively traded since most of them ended in the hands of long-only investors, which may not see it as a long-term investment.
Still, the stock will be one of the key focuses on the local bourse in the near future because it could be included in key stock indices with its free float restored to a statutory level.
The new shares will start trading on October 26.
