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Indonesian coal miner Atlas Resources decided last Friday to go ahead and launch the institutional bookbuilding for an initial public offering with a base size of up to $125 million, despite the volatile market environment that continues to make life difficult for many other listing candidates. The company, which produces thermal coal for power plants as well as metallurgical coal (also known as coking coal) for steel production, can increase the offering to as much as $157 million, if an upsize option is exercised in full.
Similar to China Hanking Holdings, a Chinese iron ore producer that listed in Hong Kong last month, sources say Atlas has secured enough demand from strategic and corporate investors before launch to make the company and its bookrunners confident that the deal will get across the line. While obviously a lot easier to obtain on a small deal, such pre-launch commitments seem to be the only way to be certain of getting an IPO done these days and several companies have called off their deals following the initial pre-marketing after failing to achieve a sufficient amount of interest from investors.
The latest in the row is Philippine power producer SMC Global Power Holdings Corp, which has decided to postpone its IPO, according to a source. The company, which is a spin-off from oil-to-beer conglomerate San Miguel Corp, did six days of pre-marketing in Asia and London but will not go ahead with a management roadshow and bookbuilding at this time. In light of the sharp rebound in Asian stock markets yesterday — the benchmark Philippine index added 1.7% — one may question whether that decision was made a bit too quickly, but the source said the company doesn’t really need the money right now and in light of the response from investors it has decided to wait for a slightly less volatile time.
SMC Power was aiming to raise up to Ps27.3 billion ($620 million) based on an indicated price range in the regulatory filing, although a final price range hadn’t been set. CIMB, Goldman Sachs, Standard Chartered and UBS were joint bookrunners, while the domestic portion of the deal was to be handled by ATR KimEng and SB Capital Investors.
But Atlas Resources is going ahead and may get an additional boost from the surprise decision by the Indonesian central bank to cut its benchmark rate yesterday for the first time in more than two years. The 25bp cut to 6.5% came as several other emerging market countries have taken measures to limit the fall-out from a slowdown in global economic growth. The Jakarta Composite Index added 2.3% during the day.
Noble Group is among the investors that have committed to participate in the IPO. The Hong Kong-based and Singapore-listed supply chain manager and commodities trading firm has a long-term relationship with Atlas as the primary buyer and marketing agent of its coal and has recently entered into a new marketing and coal supply agreement with the company. In fact, Atlas will use $25 million of the IPO proceeds to pay Noble for its marketing services under this agreement, which Noble will use to buy shares in the IPO. Hence, Noble will not actually have to come up with any cash for the investment.
No other buyers have been disclosed so far.
Atlas’s base offering will comprise up to 900.833 million shares, or 28.8% of its share capital. However, the number of shares isn’t fixed but will depend on the IPO price. The final number of shares will be adjusted to keep the base deal at up to $125 million, including $100 million of new shares and $25 million of secondary shares that will be sold by controlling shareholder Andre Abdi.
In addition to the base deal, there is an upsize option of about $32 million of new shares that can be exercised if there is enough demand. The deal also comes with a greenshoe option, which will account for 15% of the base deal, or about $18.75 million worth of shares. The greenshoe too will be made up of secondary shares coming from Abdi. This structure gives the company a lot of flexibility with regard to the deal size, and makes sure the offering isn’t too big to start with, in case the secondary market should take another beating during the bookbuilding. The only thing it must make sure of is that it needs to sell enough shares to reach a 25% free-float.
The structure is similar — albeit on a significantly smaller scale — to that used by AIA Group in its Hong Kong IPO a year ago. The insurance company offered 48.6% of the company in the form of a base offering, but then added a 20% upsize option and a 15% greenshoe. Both the upsize option and the shoe were exercised in full, resulting in a total deal size of $20.5 billion.
If the upsize option is put to use, the total deal size could increase to as much as $157 million, or $175.8 million if the greenshoe is also exercised in full.
Before the exercise of the shoe and assuming the maximum number of primary shares are sold through the offering, Abdi and his business partner Hans Kaschull will own about 65.7% of the company.
The shares are offered at a price between Rp1,500 and Rp1,900 apiece, which translates into a 2012 price-to-earnings ratio of 6.8 to 8.3 times, or an enterprise value-to-Ebitda multiple of 4.1 to 5.1 times for the same year. There are a number of listed Indonesian coal miners, and after the rally in Asian stocks yesterday, Atlas isn’t looking particularly cheap. According to sources, two of the closest comparables are Adaro Energy and Singapore-listed Sakari Resources, which gained 6.6% and 2.5% respectively yesterday. This left Adaro trading at a 2012 P/E ratio of 8.6 times and at an EV/Ebitda multiple of 3.8. Sakari is quoted at 6.6 times next year’s earnings and at a 2012 EV/Ebitda multiple of 4.4.
Atlas, which was set up in January 2007 and started production the following year, is a holding company for 19 coal mining exploration and production companies across Indonesia. It currently owns the rights to 14 mining concession areas with a combined size of 185,000 hectares across Indonesia and has entered into agreements to buy two more.
Before these latest two acquisitions, the company’s annual target design production capacity amounted to 2.38 million tonnes of coal. It is currently producing coal at three of these concession areas, and is expecting to start production at a fourth area in the fourth quarter this year. The rest of the concession areas are either in the exploration phase or under development in preparation for production. Last year, it produced 1.3 million tonnes of coal, all of which was thermal coal. It started production of metallurgical coal in March this year.
So far, most of its coal has been exported to coal-fired power plants in South Korea, but according to the listing prospectus, Atlas has also — with the help of Noble — begun to establish a reputation as a reliable producer of coal in Indonesia, China, Japan and Southeast Asia. It is planning to expand into other markets in the region, including Vietnam, Thailand and India.
The sale of more coal in the domestic market is key in light of proposed government regulations that may make coal producers sell a set percentage of their production to Indonesian companies before they are allowed to export. The coal found at its Muba Hub is well-suited for domestic sales because of its low calorific content — a kind of coal that is typically used to fire power plants in Indonesia, as well as in the rest of Southeast Asia and India. Power generators in China, South Korea and Taiwan on the other hand require coal with medium to high calorific values.
To facilitate a ramp-up of production at the Muba Hub, Atlas has got approvals to build a 100-kilometre road from the hub to a dedicated port facility near one of the rivers leading to the east coast of South Sumatra. The road is expected to be completed in the first half of 2013 and will increase the target design production at the hub to an estimated 5.1 million tonnes per year in 2013 and 9.25 million tonnes per year after 2015.
The company also intends to continue to expand through the acquisition of new concession areas, relying on the expertise and track record of its controlling shareholders and its management team when it comes to identifying early-stage concession areas that are rich in coal resources and possible to develop relatively quickly and cost efficiently.
The international bookbuilding will continue until October 18 when the final price will be determined. The Indonesian retail offering, which will consist of up to 1% of the total number of new shares to be issued, will run from October 31 to November 2 and the trading debut is scheduled for November 8. UBS is sole global coordinator for the deal and joint bookrunner together with Indo Premier Securities.
