Sinar Mas won't proceed with follow-on offering

After a two-week management roadshow in Asia, Europe and the US, Sinar Mas Multiartha has decided not to proceed with a follow-on offering that would have helped to increase its free-float and was intended to bring in at least $175 million of fresh capital.

The Indonesian company, which is the finance arm of the Widjaja family-controlled Sinar Mas group, never launched the bookbuilding and according to sources it won’t be doing so at this point in time. A key reason is that the company had to adhere to a minimum floor price that was higher than what investors were prepared to pay, making a deal in its current form almost impossible to pull together. The floor price of Rp2,555 is equal to the 25-day average closing price in the run-up to a shareholders vote on the deal in June last year, and since the share price has gained significantly since then it is actually well below where the stock is trading now. However, analysts and investors agree that the current share price is inflated by the fact that the stock is highly illiquid and hence is not a true reflection of the fair value of the company.

Indeed, the fair value estimates by joint bookrunners Deutsche Bank and UBS are roughly in line with the floor price, but since investors typically want a discount versus fair value, there was a gap that technically couldn’t be bridged.

However, the failure to launch the deal is also further evidence that investors remain selective about which stocks they buy and at what price, and that there is currently some rotation out of the Southeast Asian markets that outperformed last year, including Indonesia. Another example of this is Petrosea, which was able to complete a follow-on offering a couple of weeks ago only after a significant reduction in the offering price.

When it comes to Sinar Mas, the investor hesitation may have been affected by lingering concerns about corporate governance that have plagued the Widjaja family since its Asia Pulp and Paper (APP) business imploded in 2001 in what ranked as the largest ever corporate default in an emerging market.

The company has addressed this to some extent with its 50-50 life insurance joint venture with Japan’s Mitsui Sumitomo group that it entered into in the first half of last year. The feedback from investors suggested that they like the JV, which is expected to help the life insurance business get up to scratch with international standards and improve margins, but that they want to see a longer track record before they decide to invest. Life and non-life insurance is the biggest part of Sinar Mas Multiartha’s business, accounting for about 55% of total assets, and it holds a leading market position in both segments. It is also involved in banking, securities, leasing and a few other non-core business areas.

Another challenge for investors was that there were no direct comparables to value Sinar Mas against, since most of the top insurance companies in Indonesia are either owned by big international insurance groups or are part of unlisted domestic conglomerates. On the other hand, this makes Sinar Mas a fairly unique play on the Indonesian insurance sector and on the country’s economic growth in general.

The company had shareholders’ approval to sell up to 10% of the issued share capital in the form of new shares, which based on the floor price would have worked out at about $175 million. Based on yesterday’s closing price of Rp3,875, a 10% sale would have amounted to $266 million. However, there was also talk of a possible secondary share component to the deal, which could have increased the total offering further and given an additional boost to the free-float.

According to Bloomberg data, the free-float is currently about 40%, but sources say the shares are tightly held and the actual amount of shares available for trading is well below that. One source said the company has almost no institutional shareholders. However, there was supposedly interest among global long-only funds to participate in a follow-on share sale — at the right price.

In theory, Sinar Mas had a few different options if it had wanted to proceed with the offering. Most obviously, it could have applied to lower the floor price, which would have required another approval from its existing shareholders, or it could have chosen to do the entire transaction as a secondary share sale by the Widjaja family and then have the seller reinvest the money into the business. But, as noted, the company will do neither of those right now.

According to a source, Sinar Mas has other means of raising capital to meet its funding requirements and hence doesn’t have an urgent need to do an equity offering. However, it does need a liquidity event if it wants to broaden its shareholder base and have the share price trade more in line with the actual value of the company.

But in light of the investor feedback, the management has decided that what it needs to do right now is to demonstrate where its strategic partnership with Mitsui Sumitomo will take the business and what the two partners can accomplish together, the source said. Once there is more clarity on that, investors may well be comfortable with a slightly higher valuation.