The rise and rise of corporate Indonesia

By webadmin on 09:39 pm Jul 31, 2011
Category Archive

SK Zainuddin

It has been a year of mega deals
for Indonesia’s largest business groups. For the first time in its history,
Indonesia has seen a number of $1 billion corporate deals concluded in the
space of 12 months. And notwithstanding external shocks, the next 12 months
look like following a similar trajectory.

In the first half of this
year, corporate Indonesia managed to execute two billion-dollar deals and five
more that were above $500 million. This is unprecedented in the country’s
corporate history and reflects a fast-growing corporate sector and an expanding
capital market.

All in all, an amazing $4 billion
worth of corporate deals was executed in the first six months of the year and
market analysts are confident the second six months will be as strong.

That such major deals can now be
executed is proof that Indonesia is gaining recognition as a major economy and
an emerging regional financial center. Jakarta may be somewhat behind Singapore
and Kuala Lumpur in terms of size and sophistication but this should not
distract from the fact that a clear upward trend is underway.

Robust economic growth and a strong
corporate sector are creating enormous opportunities for the financial sector
as well and in the process deepening the country’s capital markets.

“The level of corporate activity
now underway is unprecedented,” says Russell Cranwell, managing director of
investment banking at CLSA Indonesia. “Indonesia is growing so rapidly that
there is a rush by corporates to raise new funds. It’s all about growth.”

“In the past you did not have
billion-dollar deals in Indonesia but today such deals are more frequent,” he
adds. “This is because companies are bigger and market capitalization has
improved.” International investors are looking for bigger deals but, most
critically, their appetite for Indonesia is larger.

The large Indonesian groups are
expanding at breakneck speed. At almost all of them, from Astra International
to Djarum to the Salim Group, the story is all about growth and expansion. “All
the large groups have great businesses and are not in direct competition,” says
one investment banker.

Astra and Salim, for example, are
not exactly in the same industries so both can grow aggressively. The same
applies to other groups such as Sinar Mas, Lippo, Djarum and Astra

“All the large groups have a
particular niche that works for them,” he notes. “They have all managed to find
something different and are now working to expand.”

Property companies with large land
banks are also expanding, with many of them now venturing outside the large
cities to smaller ones such as Semarang and Pelambang.

Lippo Karawaci, part of
the Lippo Group, for example, has plans to build 15 malls within the next three
years and operate 50 malls by 2016 as it seeks to tap the country’s rising
middle class and consumer spending.

In January this year, UK-based
private equity firm CVC Capital paid $773 million for a 90.76% stake in
Matahari Department Store, which is also owned by the Lippo Group. The deal was
billed as the largest private equity deal in Asia, triggering hopes that
private equity funds were back in the region.

The two groups that have benefited
most from the 1998 financial crisis are Jardine Matheson, which bought a
controlling stake in Astra International, and the Djarum Group, which acquired
Bank Central Asia from the Indonesian Bank Restructuring Agency (IBRA).

Both these groups got excellent
assets at relatively low prices and are now re-investing the cash flow in new
assets, says one market analyst.  He adds, however, that at that time few
international investors were willing to risk paying for Indonesian assets.

Djarum, which built its empire on
cigarettes, has expanded into banking, coal mining and plantations while Astra
has used its enormous cash reserves to bulk up.

Another group that is sitting on a
massive cash machine is Sinar Mas, which has invested heavily in palm oil
plantations over the past few years. The group, which was close to collapse at
the height of the crisis with $12 billion in debt, has emerged as one of the
strongest corporate groups in the country today.

Indonesian companies, says
Cranwell, are now more sophisticated in terms of understanding market trends
and leveraging on these trends.

A few years ago, it was difficult to take an
Indonesian company on a road show to some of the larger financial capitals of
the world but today that problem does not exist.

Hungry for more

With little to entice them in the
more developed markets in the United States and Europe, global investors are
likely to continue to snap up assets when they come to the market in
fast-growing economies such as Indonesia. The country’s expected impending
investment rating hike will further lower the cost of borrowing and intensify
large corporate deals.

“There is a big appetite amongst
large global companies for good deals in Indonesia,” says Giuseppe Nicolosi,
Indonesia managing partner for Ernst & Young.  “When I talked about
Indonesia 12 to 18 months ago with my counterparts in other regions, the
response was ‘so what’.

But now everybody is looking at Indonesia and while it
is still a challenging market, the level of interest has increased by miles.”

He adds that his firm has seen
increased business in conducting due diligence for M&A activity but so far,
this has been largely limited to natural resources and mining. Part of this
activity is being driven by a new generation of corporate leaders within the
family-owned groups who are selling off non-core assets.

“The new generation will have a
different approach to managing their groups,” he notes. “You will see more
activity in selling non-core assets and acquisition of assets that are deemed

Nicolosi notes that the new
generation will look at what makes sense in terms of holding on to assets. “In
some groups, you will see more professional management going forward,
especially over the next five to 10 years.

Too hot to handle

 In the natural resource and mining
sector, rising commodity prices have led to Indonesia’s own version of the gold
rush. The difference is that the mineral in demand is coal.

Over the past few years, Chinese
and Indian investors have pushed the valuations for Indonesian coalminers
sky-high as they seek to secure supply for their own fast-growing economies.

Indonesia’s coal sector is seeing
phenomenal growth both in terms of production and in the arrival of new players
on the scene.

Vallar, the resources group funded by financier Nathaniel
Rothschild, paid $3 billion last year for a majority stake in Bumi Resources,
the largest coal mine in Indonesia, and Berau Coal Energy, the fifth largest
coal mine.

Now the company, which is listed on
the London stock exchange as Bumi Plc., has come back to acquire a 75% stake in
Bumi Resources Minerals (BRM), the recently listed minerals subsidiary of the
Bakrie Group, for a further $2 billion.

“Whenever a coal asset comes up for
sale, all the big groups bid,” says CLSA’s Cranwell. Has this led to
overheating of the sector? “There is some frothiness but the million-dollar
question is whether the market has topped,” he responds.

Cranwell adds that global interest
in Indonesia’s mining sector will likely intensify, rather than diminish over
the next few years. Apart from coal, there is huge interest in other minerals
such as nickel, gold and copper.

“We are seeing a lot of people take a look at
the hard rock business and this includes local groups as well.”

Wuddy Warsono, head of sales at
CLSA Indonesia, says the demand for commodities will continue as long as
inflation is manageable and commodity prices do not rise too far.

“We are in a
sweet spot because inflation is under control but commodity prices are strong.
The big danger is the balance shifting between commodity prices and inflation.”

CLSA has already been involved in a
number of large deals this year such as the $1.3 billion Bank Mandiri rights
issue and the $700 million United Tractors right issue, which the heavy
equipment company raised to acquire a coal mine and other mining assets. 
And, says Cranwell: “We’ve got more to come.” GA