Nov 24, 2010

The next story after TPG take over, DOID

Coal mining contractor PT Delta Dunia Makmur Tbk (DOID) jumped 10.09% to Rp1,200 per share on Friday last week from the previous day of Rp1,090.
In coincidence, executives of Texas Pacific Group (TPG), one of the world's largest private equity, met  Indra Widjaja, owner of Sinarmas Group, on Thursday.
Several sources said they talked about the proposed acquisition on PT Delta Dunia Makmur Tbk (DOID)  from Sinarmas Group and Bakrie Group.
Both existing shareholders are indirectly holding Delta Dunia via Northstar Tambang Persada Pte Ltd which currently own 40% stake in DOID.
"Due diligence on DOID was done well. It seems that TPG teaming up Government of Investment Corporation (GIC) would proceed the acquisition of DOID from Sinarmas and Bakrie Group. The deal is soon to be completed," the sources said.
Delta Dunia is parent company of Indonesia's second largest coal mining contractor PT Bukit Makmur Mandiri Utama (BUMA).
Post acquisition, for sure, Bakrie Group and Sinarmas Group won't control DOID. Many have asked who is behind NTP.
TPG & GIC are estimated to propose acquisition price at a maximum of Rp1,150 per share, above the closing level last Friday on Rp1,200.
Strong indication
The sources said the acquisition will be followed with coal contracts. Along with DOID's majority take over, TPG and GIC, upcoming controlling shareholders, ask more coal contractor projects.
The first indication is Bukit Makmur has been awarded 3 year coal mining contract worth US$200 million from PT Arutmin Indonesia, coal miner controlled by PT Bumi Resources Tbk (BUMI), unit of Bakrie Group on November 12 2010.
Delta Dunia, in the official statement on November 15, filed the contract to Indonesia Stock Exchange (IDX).
Under the agreement, BUMA will act as coal mining contractor at Senakin Pit4-7 coal site with main targets of 81 million bank cubic meter overburden remodal and 6.7 million tons coal production. The newly agreement is an extension of the previous 3 year contract with Arutmin signed in 2008.
Based on Citi conference’s material, Bukit Makmur currently manages 12 coal-mining contracts. Of 12 contracts, two contracts with PT Bukit Baiduri Energy and PT Arutmin Indonesia will soon be maturing.
The contract period with Baiduri Energy started from 2001 until 2010, while Delta Dunia’s contract with Arutmin began in 2008 and shall be ended by 2011.
Apart from that, two contracts with Bayan’s Group, Perkasa Inakakerta and Marunda Graha Mineral shall be matured by 2012.
BUMA’s biggest earning contributor last year was Berau Coal with 33% contribution, followed by Adaro with 17% and Kideco Jaya Agung with 14%.
Last year, Berau Coal’s coal production reached 14.3 million tons, Artumin Indonesia posted 19.3 million tons of coal, Adaro produced higher production with 40.6 million tons. Kideo Jaya Agung and Bayan Group booked 24.7 million tons and 12 million tons production respectively.
The sources said in line with DOID's acquisition, BUMA seems to obtain another  5 year new contract from a coal company. "Two contracts will complete DOID's shares acquisition. So, after BUMA obtains contract from Arutmin, the acquisition deal seems to be done as take over and coal contracts are one package deal."
DOID's EPS stood at Rp51.83 as of September 2010 and annualized EPS of Rp61.11 in 2010. Considering the current price at Rp1,200/share, P/E DOID is around 19.63x.
UNTR's EPS was Rp890 as of September 2010 and annualized EPS of Rp1,186.67 in 2010. Considering the current market price at Rp25,650/share, P/E UNTR is 21.61x, which is more expensive than P/E DOID.
Interest saving story
Post acquisition, Delta Dunia will be inundated by several stories. From acquisition, no more Bakrie and Sinarmas, two major coal contracts, and the most interesting is debt refinancing, enabling BUMA to drag down interest charges, which is so expensive.
"DOID and BUMA are in talks with several lenders such as Sumitomo Misui Banking Corporation, Bank Mandiri, Bank of Tokyo, ING Bank, and Bank Exim to secure US$600 million loan. DOID might announce the low interest syndicated loan this week," the sources said.
BUMA is planning to refinance both bank loan and US$ denominated bonds. Referring to DOID financial statement ended September 30 2010, Delta Dunia, via BUMA, consolidated two major long term loans, so-called SMBC loan facility worth US$253.36 million as of September 2010. The facility charges annual interest rate of 4.5% premium over Libor 3 months and 5% margin.
BUMA has initiated the first payment on March 31 2010 and the facility will mature in 2013. BUMA, via Prime Dig, also manages US$315 million 5 year guaranteed senior notes issued in November 2009.
Prime Dig has made the first payment of the notes, charging an annual 11.75% and 20% withholding tax or an effective interest rate of 14.1%, which is so expensive, on May 3 2010 and another payment schedule on November 3 2010.
As of September 2010, DOID paid Rp65.05 billion notes interest. In total, Delta Dunia paid Rp408.22 billion loan interest as of September 30 2010, eroding its earning.
The sources said the newly syndicated loan will charge annual interest rate at about 6%-7%, far below interest rate of Prime Dig's bonds. "In a year, BUMA is estimated to save around US$25 million, lifting net profit."
If TPG and GIC takes over indirectly holding in Delta Dunia, will it generate mandatory tender offer?

This story above has been published at Theinsiderstories on 22 November 2010.

Disclosure: No position at the stock mentioned above. 

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