Jun 8, 2010

Flexi & Esia synergy lowers capex

Synergies and consolidation between both CDMA-based cellular technology operator Telkom's Flexi and Esia, brand name of PT Bakrie Telecom Tbk (BTEL) would be positive for PT Telekomunikasi Indonesia Tbk (Telkom) Group as it could lower capital expenditure and promote cost efficiencies.
In a company update released by Deutsche Bank on June 7, analyst Raymond Kosasih said the synergies would also promote consolidation for the industry.  
Telkom management has highlighted its intention to spin off its Flexi unit into a separate new entity, to be done at the stated book value. "We expect to hear further progression on this front post-shareholders' meeting in June," he said.
A change of article of association, particularly pertaining to material transactions, would be required. Under the new Bapepam (Indonesia's SEC) regulations, a transaction is considered to be material if it represents 50% of the company's equity base.
Deutsche Bank would view spinning off Flexi as the first step of Telkom's "exit strategy" to monetise its investments. Under the proposal, the company is to create a separate new entity for Flexi, and transfer the assets at book value.
For tax purposes, the new company must be listed and it is possible that a merger with Bakrie Telecom would potentially meet the requirement (and likely involve minimal cash transactions).
"In our view this would be sensible, and although valuations for both Flexi and Bakrie could possibly be above current market prices, these would likely not be considered material from Telkom's perspective.
Apart from some cost efficiencies and synergies, we believe such a merger would be part of an exit strategy for both Telkom and Bakrie Telecom," he said.
From the perspective of potential buyers, we believe a combination of two or more CDMA-platform operators make sense. From spectrum ownerships, a merger of at least two operators would result in a company with at least 10MHz CDMA bandwidth, which is considered to be minimum required
bandwidth for an operator.
According to comment from Kim Eng Securities' analyst, the  previous understanding was that there was a low probability for the strategic alliance between Telkom and Bakrie Telecom to take place. A number of issues were deemed as hurdles, including pricing, percentage ownership to be transacted, potential violation against anti monopoly regulation, etc.
However, per conversation with Telkom, Kim Eng was  informed that there has been a strong intention for the strategic alliance between Flexi and Bakrie Telecom. The mechanism and technicalities are still being
considered.
Market capitalization of Bakrie Telecom is Rp4.6 trillion and is trading at 28.0x 2010F PER (per estimate consensus). In comparison, Telkom’s market cap is Rp156 trillion and it is trading at 11.3x 2011F PER.
Depends on pricing and other details, the strategic alliance can be positive for Telkom. Maintain buy with target price is Rp9,100.
Bobby Gafur Umar, Bakrie & Brothers's Managing Director & CEO, as shareholder of Bakrie Telecom, the company hasn't set up talks with Telkom.
"But, we believe that the synergies would be positive. A combination of total subscribers from both operators will be around 26 million," he said.
How about Bakrie Telecom's rights issue? Bobby said so far the company hasn't discussed about such corporate action with Telkom.
As an investment holding company, there are two ways for consolidation such as co-investment or fund creation or acquisition.
"Propose consolidation is now in high level. I think it should be clearer in the next two or three months. So far, we have no idea proposed structure from Telkom to us," Bobby said.   
He said the company has repaid Rp600 billion of loan in May to two creditors. Bakrie & Brothers plans to refinance short term loans into long term debts.
"We have decided to delay US$250 million bond issuance due unfavorable global debt market situation. Demand was less than the target," he said. 

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