Mar 15, 2012

Sampoerna Strategic & Bakrie Telecom

A capital injection from Sampoerna family is an option for CDMA-based operator PT Bakrie Telecom Tbk (BTEL) to settle its rupiah bonds of Rp650 billion due in September 2012.
In an announcement yesterday, Sampoerna family via PT Sampoerna Telekomunikasi Indonesia and Bakrie Telecom have agreed the injection along with shares swap option.
Referring to the agreement, Sampoerna Strategic, owner of Sampoerna Telekomunikasi, will inject Bakrie Telecom during 10% new shares issuance without preemptive rights or 2.85 billion shares with a target proceed of Rp900 billion. It means that the rights issue could be realized at Rp315 a share, which is 23.52% premium from yesterday closing level at Rp255 a share.
Bakrie Telecom will use the proceed to pay Rp650 billion bonds and Rp250 billion aimed to buy 35% stake in Sampoerna Telecom with option to acquire the remaining stake within the next 3 years.
During the rights issue, Sampoerna Telekomunikasi entitles 6% stake in Bakrie Telecom or 1.71 billion shares. Assuming the takeover could be done at Rp315 a share, Sampoerna family might inject Bakrie Telecom with Rp538.27 billion, which is still below the rupiah bond of Bakrie Telecom maturing in September 2012. In the last stage, Bakrie Telecom and Sampoerna Telekomunikasi may merge.
What is Sampoerna's expectation from Bakrie Telecom?
Currently long term corporate credit rating of Bakrie Telecom has been downgraded to CCC+ from B by Standard & Poor's Ratings Services (S&P).
The outlook is negative. "We also lowered our rating on Bakrie Telecom Pte. Ltd.'s senior unsecured notes due 2015 to CCC+ from B. BTEL guarantees the notes."
The rating agency lowered the rating because the rating agency expects BTEL's liquidity to come under considerable pressure in the next 7 months. 
Despite an increase in tariffs in September 2011, an improvement in the company's operating performance is likely to be lower than we expected in 2012. 
S&P believes this could further strain BTEL's ability to make its lease payments, which amount to about Rp700 billion each year. 
"We also anticipate that the company will not meet its interest coverage covenant for the year ended Dec. 31, 2011, on its local currency bonds."
In addition, BTEL's weak operating performance makes it difficult for the company to raise funds to pay its local currency bonds of Rp650 billion that mature in September 2012.
"BTEL's operating performance for the quarter ended Dec. 31, 2011, is likely to have been weaker than our expectation for the previous 'B' rating," said Standard & Poor's credit analyst Mehul Sukkawala. 
"A higher-than-expected fall in voice and SMS traffic largely offsets the expected improvement from tariff hikes. We also expect the company's financial performance to be very weak in 2012."
S&P believes BTEL has 'weak' liquidity, as defined in our criteria. The company's liquidity sources are likely to cover liquidity uses by 0.6x in the next 12 months. "We also expect that BTEL will breach its local currency bond covenant in 2 to 3 months."
The main idea of S&P statement is weaker operating performance, a possibility not to meet interest coverage covenant, and weak liquidity.
If Sampoerna Strategic really wants to consolidate its mobile company with Bakrie Telecom, the question is why Sampoerna does not have options to buy more shares in Bakrie Telecom? In contrast, Sampoerna family allows Bakrie Telecom to buy all remaining stake in Sampoerna Telekomunikasi within the next 3 years.   
If you were an owner of Sampoerna Telekomunikasi and you think that Sampoerna Telekomunikasi has good prospect in the future, do you think you can allow other party to buy all stakes and then the other party give you merely 6% stake of controlling in return?
Telecommunication is uneasy business today. It requires massive capital to support infrastructure expansion. If Sampoerna family is willing to sell all stake in Sampoerna Telekomunikasi within the next 3 years for just 6% ownership in Bakrie Telecom in return, do you think Sampoerna family plans a cash out or develop telecommunication business?
 Disclosure: No position at the stock mentioned above. 

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