The Indonesian government disposed one more of its residual holdings in the domestic banking sector yesterday (January 18), raising $147 million from the sale of shares in Bank Internasional Indonesia (BII).
Temasek Holdings, the investment arm of the Singapore government, is said to have made a bid for the entire deal and been allocated a 6.1% stake in the bank. Based on recent ownership figures, this will boost its overall holding from about 28.5% to 34.6%.
Pre-deal Temasek owned 50% of the Sorak consortium, which successfully won a 51% stake in BII at a government auction in November 2003. As of September 2004, Sorak held 56.88% of BII, with the government owning a further 20.78% and the remaining 22.34% in freefloat.
The government now drops to 5.53%, while other Sorak consortium members remain flat. These constitute Barclays, ICB and Kookmin Bank, which formerly owned 25% of Sorak, but had 51% of the voting rights.
A total of 7.29 billion shares were sold at Rp185 each - flat to the stock's spot close the previous day. The deal was led to great success by CLSA, Mandiri Sekuritas and Nusantara Sekuritas.
This was by no means a foregone conclusion, however, thanks to the considerable uncertainties faced by the bookrunners as a result of the government's "unusual" placement procedures. Late last year, it instituted a new set of rules in a bid to promote greater transparency and avoid allegations of corruption.
This entails the Finance Minister setting a floor price for each government divestment. However, the floor price is not revealed to investors nor, more crucially, to the underwriters until after the order book is closed. At this point a notary will open a sealed envelope and let the underwriters know whether a deal can be completed or not.
This consequently means a deal could unnecessarily unravel simply because no-one knew where the government wanted to execute a sale. So too, the bookrunners' job has also been made all the more difficult by the government's recent pricing expectations.
Secondary offerings are rarely priced flat or at a premium to the last sale. Yet the Indonesian government has achieved both these feats during its last three market offerings.
A divestment in Bank Danamon last November priced at a slim 0.7% discount to spot thanks to a backstop bid by Temasek. This was followed by a divestment in Bank Permata in December, which had no freefloat to reference pricing against and was therefore sold at a 6.68% premium to the acquisition price paid by Standard Chartered. Finally in December a small divestment in Bank Niaga priced flat to spot, largely thanks to its small size.
In BII's case, the government was once again able to rely on an anchor investor, which was likely to push pricing to tight levels. But this too was complicated by a second new ruling, which states that investors must be allocated stock pro rata to the size of the order they submit.
Thus Temasek is said to have waited until the final minute of the bookbuild before it submitted its bid. In this way, it made sure institutional investors could not latch onto its participation and inflate their orders.
At the final issue price of Rp185, the order book is said to have closed 2.48 times covered (including Temasek). At a bid price of Rp180, the book was 2.8 times covered. The slim differential between the two shows investors correctly judged the likelihood of a floor price flat to spot.
But the bookrunners are said to have been nervous that even this level was not aggressive enough and were concerned the Finance Minister may have been led into setting an artificially high floor price. This is because one "investor" unexpectedly bid for paper just as the exchange was closing on Monday lunchtime when the Finance Minister was due to set his floor price. It pushed the stock price up from Rp185 to Rp190, but when trading resumed in the afternoon the stock fell back to Rp185 again and closed at this level.
In the end about 27 investors (excluding Temasek) participated in the deal, which had an overall split of 40% Temasek, 40% offshore investors, 20% onshore investors. The deal represented a fairly weighty 70 days trading volume.
The government is likely to be very rightly pleased with the success of the deal and what turns out to have been an astute market judgement. Its achievement is all the more impressive in the context of BII's current valuation and an institutional trading drift away from Indonesia to Thailand.
Analysts say BII is currently valued at about two times book - a high level by regional standards. At 13 times 2005 earnings, it also trading in the top quartile of Indonesian banks on a P/E basis even though it has weaker financial ratios than many of its peers. Most of this valuation premium can probably be attributed to the "halo effect" of Temasek and the beneficial operational changes it has been imposing.
The Indonesian government, via its divestment arm PPA, has lined up six bank sales this year - mandating two each to CLSA, JPMorgan and UBS. Specialists say the next deal ready to go is likely to be Bank Central Asia (BCA).
