Monday, January 09, 2006

Indosat buyback: What the heck?

Ever since Indonesia government officers announced the plan to buyback shares of telecommunication giant PT Indosat Tbk from ST Telemedia, a subsidiary of Temasek Holdings, its price has been jumped significantly at the Jakarta Stock Exchange (JSX). In the last few days, the shareholders have gained almost 8% increase. And that would make the buyback even costlier for the state.
The cost estimation was 12 trillion rupiah (almost US$1.25 billion) for 40.77% shares owned by ST Telemedia, doubled the government's income of 6.6 trillion when it sold the shares to ST Telemedia three years ago. It means that in three years, ST could make profit of 6 trillion rupiah, while Indonesian government would incure loss of the same amount.
The 12 trillion rupiah budget was for 5,300 rupiah per shares of Indosat. As the price goes up to above 6,000 rupiah, government would need additional 1 trillion rupiah. Bisnis Indonesia reported on Saturday that investment bankers in Singapore even heard of a possible buyback price at 6,400 to 7,000 rupiah per shares. That would translate to an additional of 3 trillion rupiah that the government should pay.
ST Telemedia surprisingly rejected the offer saying it would maintain the shareholding in Indosat. Responding the rejection, government officers went on with another statement that it would buy the shares from public investors on top of its 14% shares in Indosat.
Why in the first place would the cash-strapped government willing to sacrifice such huge amount of loses ahead of a plan to sell majority shares of flagship carrier Garuda Indonesia?
The simple answer was that Indosat is a strategic company from various aspects, including the national security of information. Indosat is seen as a profitable company as well. Buying back the shares would resume government's control over the company.
I remember government's reason behind Indosat divestment three years ago about the company's huge debt and hungry of fresh capital. In fact, the company's debts to equity ratio increased significantly from 41.5% in September 2004 to 51.2% in September 2005. Debts to EBITDA ratio also jumped from 178.6% to 224.5% as the margin slightly reduced to 57% from 59% in the same period.
As of December 2005, Indosat's cellular subscribers totaled 14.4 million, exceeding its 2005 target of 14 million. "Indonesia's cellular market has tremendous growth potential because of the low penetration level," Hasnul Suhaimi, president director of Indosat said.
Only 19% of Indonesia's population of 220 million own cellular phones, providing considerable room for growth. Analysts expect penetration this year to increase to 25% in 2006 and 35% in 2007. Even with such growth potentials, the profit margin of the business would significantly shrinking due to stiff competition.
Two major telecommunication player from Malaysia have entered the market. Maxis Communications acquired Natrindo and Telekom Malaysia controlled Excelcommindo, the third largest cellular player. Other groups, Sampoerna Family and Sinar Mas Group, are also preparing big investment in the sector.

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