Roadshows begin in Hong Kong this Monday for a Rp7.55 trillion to Rp8.15 trillion ($620 million to $670 million) equity offering by Link Net, the broadband and cable TV arm of Indonesia's Lippo Group.
To all extents and purposes the 1.217 billion share deal represents an initial public offering since the group only raised Rp486 billion ($42.3 million) when it originally listed on the Jakarta Stock Exchange in June. Like others before it, this technical listing was executed for tax purposes.
The new transaction has a single global tranche and constitutes all secondary shares. Pricing is scheduled for Friday October 24 under the lead of joint global co-ordinators Credit Suisse and Goldman Sachs, with CIMB and Ciptadana as joint bookrunners, plus BNP Paribas and Deutsche Bank as co-leads.
The deal will boost the group's market capitalization from 10% to 50%, with the majority of shares being offloaded by controlling shareholders First Media and private equity group CVC. Together, they will sell a 33% stake, with the split between the two yet to be finalised.
CVC first purchased a 49% stake in 2011 for a total of $274 million and has also worked alongside the Lippo Group after acquiring a majority stake in Matahari Department Stores in 2010.
The remaining 7% stake in Link Net will be sold by two other private equity funds.
The deal is being marketed on a price range of Rp6,200 to Rp6,700, which represents a 2015 EV/Ebitda valuation of 11.7 to 12.6 times. Given the current volatile market backdrop, a deal of this magnitude needs careful handling and the leads have run an extensive cornerstone and anchor process to lock up demand.
As a result, the deal is already said to be 90% covered as it begins the formal marketing process. A total of nine cornerstones have signed up for $258 million, with no lock-up.
The nine include: Columbia Wanger, Goldman Sachs Investment Partners, Morgan Stanley Investment Management, Myriad Asset Management, Neuberger Berman, Och-Ziff Capital Management and William Blair.
A further group of 21 anchor accounts are also signed up and account for 47% of the book.
Valuation
The overall market backdrop remains unpromising with the Jakarta Composite Index starting to fall from its all-time highs on September 19. Since then, there have only been five positive trading sessions and many analysts believe the market will continue to soften in the run up to the impending fuel price hike in November.
At 11.7 to 12.6 times EV/Ebitda, Link Net is being pitched at a discount to more mainstream Indonesian consumer plays such as Matahari Department Stores. This currently trades on a 2015 EV/Ebitda multiple of 14.8 times.
In terms of media companies, free-to-air TV operator Surya Citra Media commands the highest EV/Ebitda multiple and is currently trading at 17.9 times on a 2015 basis. Year-to-date, the stock is up 33.1%, although it has come down 8.7% since the beginning of the month in line with the rest of the market.
Indonesia' largest pay-TV operator, MNC Sky Vision typically trades at a lower multiple and is currently valued at around seven times on a 2015 EV/Ebitda basis. It has had a volatile trading year, rising to a high of Rp2,445 in early March, before plummeting to Rp1,315 as of September 25.
Since then, news of Link Net's new deal has prompted a re-rating, with the stock climbing 47.1% to close Friday at Rp1,935.
Sources close to Link Net say investors are also looking at global cable companies such as Liberty Global on a cash flow basis, but not as a direct comparable since penetration rates are far higher in developed countries. These companies tend to trade in a seven to eight times 2015 EV/Ebitda range.
Since it listed at Rp1,600 per share in early June, Link Net has almost quintupled to a high of Rp7,500 on October 1. The first two trading days of the month saw it drop to 7,200 before pretty much flat-lining at that level ever since.
Parent company First Media has also witnessed a very significant re-rating over the course of 2014, with the stock climbing from Rp570 at the beginning of January to a high of Rp3,610 on October 2. It closed Friday at Rp3,400.
First Media will remain the controlling shareholder of Link Net once the deal is completed. It also controls the group's other media companies including satellite TV operator, Big TV, which launched in 2013.
Big TV is aimed at Indonesia's rural heartlands where terrestrial TV signals are weak, while Link Net is aimed at its more affluent city dwellers.
Increasing internet penetration in Indonesia
Link Net's chief asset is Indonesia's largest two-way hybrid fibre coaxial cable network. This was able to access 1.3 million homes at the end of the first quarter of 2014 and the group plans to increase the number to 1.7 million by the end of 2016.
The network's geographical reach spans Greater Jakarta, Surabaya in East Java, the island of Bali and since earlier this year, Bandung in West Java. Fibre's great advantage over older copper twisted pair cable networks is that it can handle significantly more bandwidth and a higher number of broadband services.
As of the first quarter, Link Net had 685,000 residential revenue generating units with an almost 50/50 split between broadband and cable TV subscribers. It also has 1,332 corporate clients.
By the end of 2015, it hopes to sign up a further 500,000 broadband subscribers.
By comparison, state-owned PT Telkom has 27.8 million data subscribers. It is currently trading at 5.4 times 2015 EV/Ebitda and is up 29% so far this year.
In its most recent second quarter results, Telkom revealed it had added a further 96,000 subscribers to its Speedy broadband service, with revenues growing 8.1% year-on-year. However, in recent years, Telkom has consistently disappointed investors with its relatively slow growth in subscriber additions.
As a result, Indonesia has one of the lowest internet penetration rates in Asia and some of the slowest broadband speeds. According to recent research by global broadband tester Ookla, Indonesia averages 4.9 Mbps compared to 93.4 Mbps in Hong Kong.
Speeds are slightly higher in Jakarta at 6.83 Mbps, but still significantly lower than other Asian capital cities. Of the country's ISP's, Link Net provides the fastest speeds according to Ookla at an average of 16.2 Mbps.
The company also offers a premium FastNet package with speeds of up to 100 Mbps, which services heavy users such as corporates, online gamers and media companies. Indeed, one of Link Net's chief selling points is its high speed connectivity and the dynamism of its management compared to the country's state-owned monolith.
One of the new government's targets is to spur Telkom back into action and increase the national internet penetration rate up from its current 28% level, or 71.91 million people as at the end of 2013.
The government wants 16% of the population to have access to a broadband connection of at least 3 Mbps by the end of 2014 and 71% to at least 20 Mbps by the end of 2019. Telkom has been tasked with laying the fibre optic network to facilitate this.
Strong growth potential attracts more competition in pay-TV
First Media's cable TV operations currently rank second behind MNC Sky Vision, owned by the Tanoesoedibjo family's Media Nusantera Citra (MNC). The satellite-based pay-TV company, which operates the Indovision brand, had 2.4 million subscribers at the end of the first half and benefits from the local language content provided by its parent MNC.
Link Net has far few subscribers for its HomeCable offering, but the company believes its overall growth potential is far stronger because it bundles content and broadband. This enables it to charge far higher prices.
For example, its combo package had a monthly price tag of Rp1,400 (maximum) and Rp380 (minimum) in the first quarter compared to Indovision's Rp300 (maximum) and Rp100 minimum.
During roadshows, management will argue that this pricing premium means Link Net deserves a valuation premium to other media companies. In turn, Indonesian media companies also typically trade at higher multiples than other Asian markets because growth rates are higher.
Many research companies have flagged Indonesia's pay-TV potential, notwithstanding the fact that piracy is a major issue. Media Partners Asia forecasts that Indonesia's pay-TV subscriber base will jump from 2.4 million in 2012 to 8.7 million by 2020.
This will increase the penetration rate from a lowly 7% to 21%.
This potential has not been lost on many of the country's leading families and the competition is getting more intense with the entrance of new players. Investors will therefore need to decide how this will re-shape the industry in the coming decade.
In March, for example, Kompas Gramedia Group, the owner of Indonesia's largest newspaper, launched K-Vision and is targeting 500,000 subscribers by the end of year one. Meanwhile, the Bakrie group has launched Viva+ in association with the Thohir family's TNT Group under its listed entity Visi Media Asia.
Last year, Chairal Tanjung's Trans Group also acquired a majority stake in Telkom's pay-TV arm TelkomVision, under an agreement, which sees the phone company provide the infrastructure and Trans Group the content.
Fuel price hike impact on consumer confidence
The long-term dynamics and demographics fuelling Indonesia's GDP growth and its expanding middle class are well known. But over the short-term, investors will also need to decide what impact the impending fuel price hike is likely to have on consumer confidence.
Some analysts believe consumption growth may be more muted in early 2015 as consumers adjust to a higher cost of living. For the past two years, Indonesia has recorded private consumption growth of 5.3%, but some analysts believe it may drop to 5% this year and to 4.7% in 2015.
At the same time, inflation will remain relatively high at around 6.4%, though down from its 8% level in 2013.
Financials show strong Ebitda growth
For the 2013 financial year, Link Net reported revenues of Rp1.66 trillion ($140 million) and net profits of Rp593.8 billion ($50 million). Compared to 2012, this represented a 27.6% increase in revenues and 6.7% growth in net profits.
In terms of business segments, broadband revenues amounted to Rp953 billion in 2013 and cable TV revenues Rp553 billion, with media advertising making up the remaining Rp94 billion.
In the first half of 2014, the company recorded revenues of Rp1.067 trillion, of which broadband accounted for Rp619 billion, cable TV Rp396 billion and advertising Rp52 billion.
Industry analysts forecast that Ebitda is likely to grow by 34% in 2014 and 31% in 2015.
