Sell-down in Indonesia's Delta Dunia could raise $460 million

Delta Dunia Makmur, the Indonesian property company that has teamed up with private equity firm Northstar Pacific Partners to acquire the country's second largest coal mining contractor, has launched a share placement that could increase the group's free float to as much as 55% from 17% today.

The deal will see Delta Dunia's largest shareholder, Credence Trust, sell at least 24% of the company to investors, and potentially as much as 38% if the upsize option is used in full. Based on the offering price range, the base deal will total between Rp2.187 trillion and Rp2.754 trillion ($228 million to $288 million) and including the upsize option the deal could be as large as $460 million.

The details of the placement were announced yesterday, but the company embarked on a roadshow last Thursday and by the time the books close this Thursday the management will have met with investors in Singapore, Hong Kong, London and the US.

This sell-down comes ahead of a separate sale, but by the same shareholder, of a 40% stake in Delta Dunia to Northstar, which is scheduled to take place on Friday. Also on Friday, Delta Dunia will complete the $550 million acquisition of 100% of unlisted coal mining contractor PT Bukit Makmur Mandiri Utama, better known as Buma.

Following these transactions, which effectively amounts to a backdoor listing of Buma, Delta Dunia will sell its existing property business -- it currently owns majority stakes in three development projects of which two are still undeveloped -- to focus entirely on coal mining services. And Northstar will be the single largest shareholder in Buma through its 40% stake in Delta Dunia. Credence Trust, which is controlled by a private individual, will own between 5% and 19%, depending on the outcome of this placement.

The base deal is made up of 1.62 billion secondary shares, corresponding to 24% of the company, and the upsize option could bring another 980 million secondary shares into the deal, increasing the size to 38% of the outstanding issued share capital. The shares are offered to investors at a price between Rp1,350 and Rp1,700, which represents a discount between 10.5% and 28.9% versus Delta Dunia's closing price of Rp1,900 yesterday.

Delta Dunia's share price has gained 280% since the end of May, including 26.5% over two days in late August after the acquisition of Buma was confirmed and investors will be buying into it on the basis that it will complete the transformation into a coal mining contractor.

Consequently, many investors prefer to look at the valuation in relation to United Tractors, the listed owner of Indonesia's largest coal mining contractor Pamapersada Nusantara (Pama). And according to a source, Delta Dunia is being offered at a 10% to 30% discount against Buma's larger rival. However, United Tractor is not a pure-play mining contractor -- as Delta Dunia will be -- but is also involved in the distribution of construction machinery and two years ago it made a move into coal mine operations through the acquisition of a coal mine in South Kalimantan.

The involvement of Northstar, the Indonesian affiliate of Texas-based private equity firm TPG Capital, has no doubt been key for this whole takeover as Delta Dunia is essentially a shell company that moved into property investments as recently as last year. Between its establishment in 1991 and 2008 its main business was textile manufacturing. Its 2008 revenues of $900,000 are dwarfed by the $662 million that Buma generated in the same year and it is questionable whether it would have been able to come up with the funds necessary to carry out the acquisition without the backing of the private equity firm. 

Over the past week, Buma has raised $315 million from the sale of 11.75% five-year bonds through Barclays Capital, Deutsche Bank and ING and $285 million from a four-year loan arranged by Barclays Bank, which will be used to repay an outstanding loan from Sumitomo Mitsui Banking Corporation and to buy out the existing Buma shareholders. The combined interest cost on the bond and the syndicated loan will be 9.46%.

Delta Dunia has agreed to pay $240 million in cash for Buma and to assume $310 million of the company's existing debt.

CLSA and Macquarie are joint global coordinators for the placement and also act as joint bookrunners together with domestic banks Bahana and Danareksa.