PT Medco Energi raised $260 million last Friday (July 29) through an equity deal that may mark an important turning point for corporate Indonesia. In the eight years since the financial crisis, primary equity issuance from the country has been almost exclusively dominated by government sell-downs in the banking and telecom sector.
Now for the first time, one of Indonesia's troubled business families has been able to rehabilitate its reputation and financial standing through a major public equity transaction. For the Panigoro family that owns PT Medco, completion of the equity deal means that its fortunes have almost come full circle.
The family lost control of Medco following a debt restructuring in 1999, but was finally able to wrest it back this February thanks to the willingness of a core group of high yield investors to fund a leveraged buy-out (LBO). The new equity deal will take out most of this high yielding debt and it seems likely the family will upstream dividends to remove the remainder when a call option in the LBO financing package falls due next February.
Last week the Bakrie family completed a somewhat similar re-financing exercise through a $200 million exchangeable into PT Bumi Resources led by JPMorgan. However, that deal was collateralized and syndicated to less than a dozen investors, whereas Medco has attracted 119 institutions through a fully marketed bookbuild.
The two lead managers, Credit Suisse First Boston and Merrill Lynch plus UOB as joint-lead, treated the deal like an IPO rather than a secondary offering since the existing freefloat was only about 8%. Should the greenshoe be exercised, the freefloat will expand to roughly 45.5%, with the Panigoro family dropping from 85.5% to 54.5%.
The $300 million deal (post shoe) therefore represents 31% of the company's outstanding share capital. A total of 1.034 billion shares were sold at Rp2,850 each, towards the bottom end of a Rp2,750 to Rp3,500 indicative range.
Investors had the option of buying common shares or GDRs and about 95% are said to have opted for the former. One GDR equals 250 shares.
The order book is said to have closed around the $900 million level, with 15 orders for more than $20 million.
By geography about 40% of demand came from Asia, 30% from the US and 30% from Europe. By investor type about 60% of demand came from long-only accounts and 40% from hedge funds.
About a quarter to one third of demand came from sector specialists, while roughly two thirds of participating investors had no current equity exposure to Indonesia at all.
As one specialist comments, "PT Medco had almost no institutional following before this deal. It marks a major turning point for the Indonesian equity market and also for Medco, which ranks14th largest by market capitalization."
At the time the new deal priced, Medco's shares were trading at Rp3,200. This means the new deal has priced at a 12% discount to spot - a fairly standard level given that most IPO's come at a 10% to 15% discount to fair value.
The stock had a volatile few days in the run up to pricing, however. It rose 11% two days before books closed, only to drop 15% the day ahead of pricing.
Year-to-date it is up 57.83%, vastly outperforming the underlying market, which is up just under 20% over the same period. Over a 12-month period it has returned an even greater163.86% thanks to the combination of high oil prices and greater clarity over the company's long-term ownership.
At Rp2,850 per share, the company has been valued at about 11.5 times 2006 earnings. Specialists say the vast majority of demand fell in the 10 to 12 times bucket.
In Asia, comparables such as China's Petrochina and Thailand's PTTE&P are currently trading at respectively 10.5 and 14.5 times 2006 earnings. Further afield, Australia's Woodside Petroleum and Santos are currently bid at respectively 15 times and 21 times 2006 earnings.
The crux of the equity deal is the LBO, which funded stake sales by PTTE&P and CSFB. At the time of the financial crisis, CSFB's distressed debt team hoovered up huge chunk of Medco debt that was subsequently converted into equity.
In 2001, CSFB sold part of its stake to PTTE&P, which became a strategic investor in the group. Both these stakes were held under the umbrella of a company called New Links Energy, which owned 85% of Medco. PTTE&P held 40% of New Links, with the Panigoro family holding a further 40.1% and CSFB 19.9%
The remaining 15% of Medco was divided between the freefloat (6.2%), treasury shares (4.7%) and other investors (4.1%).
In 2004, PTTE&P decided to re-focus its energies on its home market and bid out its stake. After securing interest from Petrochina, Indian Oil Corp and Temasek, it decided to make the Singapore government investment arm its preferred bidder in October 2004. At this point CSFB decided to sell its stake too.
However, the Panigoro family had pre-emptive rights, which enabled the family to match any bid for the company. These expired in February 2005.
The family, therefore, had just a few months to put together a financing package and match Temasek's bid, else lose majority control of the company. Brothers Arifin and Hilmi Panigoro needed to find $114.1 million to buy-out CSFB and $236.5 million to buy out PTTE&P.
At this price, PTTE&P stood to make a 20% return on its three-year investment - it paid a combined total of $226.37 million for its original stake and had received $33 million in dividend payments in the interim period.
Fund managers say the Panigoros' advisors Merrill Lynch and UOB came up with a deal that would net the family $468 million via a three tranche structure that matured after two years and was callable after one. It was syndicated as a club deal to just under a dozen investors.
One tranche of the debt was collateralised by shares and carried a coupon of Libor plus 10%. A second tranche of debt plus options was also collateralised by shares and had a coupon of Libor plus 9.5%. In addition, there is believed to be a step-up feature taking the coupon to Libor plus 10%.
The third tranche was a synthetic equity tranche and comprised call options with a maximum strike price of 150%. Par value was based on the Rp1,850 price per share that Temasek bid for the company. Thanks to the company's share price performance since then, these options have now hit their ceiling.
The high expense of the debt package was driven by a number of factors. Firstly, the funds were being lent to the family rather than the operating company, Medco. Secondly, until the family was able execute an equity offering, the freefloat would remain extremely limited. Thirdly, the level of collateralization was quite low - two times.
A year earlier, for example, the Bakrie family had structured a similar loan via CSFB. This $99.8 million deal had a three-year maturity, a coupon of 18% and three times collateralization using the family's holding in its listed vehicle, PT Bumi Resources.
Proceeds from Medco's equity deal are being used to re-pay the family's debt and will be held in a reserve account until the call options fall due in February. The shortfall is likely to be funded by dividends.
During roadshows, the company told fund managers it intends to pay up to 50% of net income in dividends in the coming financial year.
For fundamental equity investors, the two key considerations now are the direction of oil prices and Medco's ability to replenish its reserves.
Since the company made moves to take over New Links in the fourth quarter of 2004, oil prices have shot up from $42 per barrel to just over $60. This helped push operating profit up 36% to $51.8 million at the end of the first quarter.
But oil production on a stand-alone basis has been declining over the past few years. In 2002, for example, the company was pumping 86,000 barrels of oil per day. By the end of 2004, the figure had fallen to about 54,000.
According to local rating agency Pefindo, Medco had 119.6 million proved barrel of oil equivalent (boe) at the end of 2004 and a further 237.5 million proved and probable boe. Its acquisition of Australia's Novus Petroleum during the same year added a further 70.3 million proved boe.
However, as all the rating agencies have also pointed out, Medco's reliance on ageing oil fields has resulted in higher lifting costs. In 2004, 49.4% of total oil sales came from ageing fields.
Its ability to access to new fields will therefore be a key driver of its share price going forwards. Recent finds at its Jeruk oil field (acquired 2004 in a JV with Santos) have lifted analysts' confidence in recent months.
So too, during roadshows the company announced plans to establish a joint venture with US oil company Anadarko. The latter will invest a minimum of $80 million to explore new oil fields in Indonesia. Medco will not contribute funding, but will share 50% of the profits.
In a ratings release published this June, Moody's said that Medco's adjusted debt to proved developed reserves stood at $4.4 at the end of 2004. It also said these reserves had a short life of 4.2 years.
It said both these levels were consistent with the company's B1 rating and it would consider an upgrade if Medco could expand the reserves' life to seven years and bring the adjusted debt ratio down below $4.
