Smooth sale prompts disbelief

Indosat: third time lucky for the sell-off of a stake in Indonesia's second-largest telecom

"I'm cynical about most things that go on here. But the transaction progressed remarkably smoothly and I think the market is in a state of disbelief," says Paul Dammkoehler, co-head of equity research at Bahana Securities in Jakarta. "The bid that won was the most attractive and there were zero delays." In the past, controversy, stalling and politicking have surrounded such attempts.

It was third time lucky for Indonesia's second-largest telecom. Previous efforts to sell Indosat in 1998 and 2000 met with failure. A government attempt to sell 11% a few months earlier was also contentious. Interest from investors was at best tepid and Merrill Lynch selling 4.14 million Indosat shares the same day the government attempted to dispose of its stake didn't help. Only 8% was sold. An irritated minister for state-owned enterprises, Laksamana Sukardi, demanded an inquiry, citing conflicts of interest. No underhand dealings were ever exposed.

Fourteen investors emerged when bidding started in August. In November four were left: Desa Mahur, Hong Kong's Gilbert Global Equity Capital, Telecom Malaysia, and STT. By December 13, the deadline, STT and Telecom Malaysia were left.

Telecom Malaysia was the favourite. And rumours in the market suggested the government would have preferred it. Politicians and local analysts were concerned that if STT were to win, Singapore would have too dominant a grip - Singtel already has a 35% share in Telkomsel, Indonesia's number one mobile operator.

However these fears were allayed when the government quickly pointed out that it had the power to regulate domestic phone tariffs and is also the controlling shareholder in Telkom, the owner of Telkomsel.

SST's successful bid came on December 16. The price offered was high: at Rp12,950 a share at a premium of 50.6%. "There has been a lot of ingrained opposition to asset sales in the past. But this time there was very little. And the price definitely helped," says Michael Chambers, head of research, CLSA Indonesia.

Chambers suggests that another reason for success was Indosat management's recognition that privatization was the only way to survive. "If the management had had a choice they wouldn't have privatized," he says. "But they weren't given a choice because the government had said it was not going to invest any more in technology businesses. And the management was realistic about facing life on their own. Indosat would have disappeared in 10 years."

For STT the bidding was the easy part. Its challenges are just about to start. "Taking control of an Indonesian company is never simple. Even if you have ownership you don't always have control," says Dammkoehler. Also Indosat's cellular business, Satalindo, could be a problem.

With network capacity shortages investment is needed. But, says Chambers, compared with its large competitor, Singtel, STT doesn't have that much to throw at the problem. STT can afford to invest about $100 million a year, while Singtel can put up to $500 million in Telkomsel. But Chambers reckons it was still a good deal for STT.

Analysts aren't getting carried away. "This is only a company of 2,000 people. The deal isn't an about-face for foreign investment," says one. "Psychology doesn't change overnight and positive sentiment won't return soon. And there are still problems with the court system and corrupt hidden expenses."

However, there are short-term benefits. Such asset sales are needed to meet IMF conditions for a $4.8 billion bail-out and to cover the budget deficit. And for the first time, privatization hit its target. In 2002, Rp8 trillion ($900 million) of assets were sold, against a projected Rp6.5 trillion.