IFR deal profiles: Reliance Energy, Bakrie

These articles appeared as part of an IFR Asia report on equity capital markets in May 2008

Bakrie & Brothers rights issue

Bakrie & Brothers has a grand ambition to become the largest and most diversified strategic investment company in Indonesia. Getting there has involved a host of restructuring efforts, but much the biggest part of it was a US$4.4 billion rights issue completed in April – the biggest ever equity offering from Indonesia, in some of the most challenging market conditions for years.

Central to Bakrie’s plan is an acquisition of stakes in three listed companies: Bumi Resources, the coal company; PT Energy Mega Persada; and real estate group PT Bakrieland Development. Bakrie is taking between 35 and 40% in each, and between them the acquisitions have cost US$5.3 billion – Indonesia’s largest ever M&A transaction. Today, Bakrie embraces telecoms, plantations, infrastructure, pipe manufacturing, building materials, automotive components, and now these three new sectors.

To put the scale of this deal into context, before the deal Bakrie & Brothers’ market cap was US$748 million – less than one fifth of the size of the rights issue. It held other assets (notably 54% of PT Bakrie Sumatera Plantations, with a US$688 million capitalisation, and 56% of Bakrie Telecom, worth US$868 million) but this was still clearly a transformational deal. Even on May 6, two weeks after the rights issue was completed, Bakrie’s market cap was US$5.2 billion: still less than the combined cost of the three acquisitions.

A rights issue on this scale meant increasing the available stock of the business many times over. The subscription ratio was 119 rights for every 20 existing shares, with more than 80 billion shares sold at Rp500 per share. Doing so required a discount of 9.1% to the previous close and also required Credit Suisse, Danatama and Bakrie Capital to act as standby purchasers. They were committed to taking up any rights not fully subscribed for by existing shareholders. It wasn’t plain sailing – the subscription date was extended by two days after the offer period closed, and the deal barely got shareholder approval after scraping past the minimum quorum of shareholders  – but it did get done.

Credit Suisse says the deal was well received by existing shareholders, and by other followers of the Bakrie companies. Additionally, since the acquisition prices of the three stakes were announced in advance, some arbitrage took place.

It’s not clear how many of the shares the standby purchasers had to take on, but there was a mighty incentive for existing shareholders to subscribe: the alternative was being diluted six times over. Bakrie Capital had by far the biggest commitment to absorb shares, at over 65 billion of them, but then as the investment arm of the Bakrie family it is part of the group that would receive the proceeds anyway. Danatama’s commitment is understand to have been for 14 billion shares, and Credit Suisse for a more modest one billion.

The stock did fall immediately after the rights issue, but barely any more than the market did.

Bakrie has launched a rights issue before, and on a similarly multiplied scale; in 2005 it offered a 62 for 25 issue, although it took three annual general meetings for the deal to be approved. Bakrie itself is a company controlled by the family of Aburizal Bakrie, who is Indonesia’s chief social welfare minister. Many Bakrie companies have a history of default both during and since the Asian financial crisis.

Bakrie illustrated a broader point in Asian equity capital markets: that while IPOs are sidelined, rights issues are taking up the slack as an effective fundraising method. According to Dealogic, by April US$9.9 billion had been raised in rights issues from 30 deals, compared to US$6.2 billion in all of 2007 – which was itself a record. Asia made up 40% of rights offerings worldwide in 2008 up to April, says Dealogic; in 2007 it accounted for only 7% of the global figure. Other major rights issues have included a US$4.2 billion raising from State Bank of India, led by Citigroup, Merrill Lynch, Deutsche Bank, Calyon, Kotak Mahindra Finance and SBI Capital Markets. Smaller deals have included three from Singapore in the space of just over a week (for hospital operator Parkway Holdings, with private equity firm TPG agreeing to take up unsold shares; K-REIT Asia, with Keppel Corp and Keppel Land standing by; and Olam International). There has also been a rights issue from Taiwan’s Shin Kong Financial Holding.

Reliance Power IPO

Judged by scale, this was a landmark: a Rs115.6 billion (US$2.95 billion) IPO, India’s largest ever float, and the highest demand ever generated for a private sector IPO. It boasted a 73 times oversubscription that saw books covered within 60 seconds of opening.

But in some ways it’s the details in the background that make the deal even more striking. For one thing, this extraordinary demand was created for a company that doesn’t yet own a single cash-generating asset. For another, it’s understood none of the lead managers have actually been paid yet and are not at all certain how or how much they will be.

Underpinning it all is the strength of the Reliance name, and its chairman, Anil Dhirubhai Ambani. Even after the split between the Ambanis and their assets, ADA group companies have a combined market cap of over US$100 billion including Reliance Power, according to UBS (Reliance Power’s implied market cap at launch was US$25.9 billion). Without that name, and the combined allure of power and India, there is no way a collection of assets that have yet to leave the drawing board would have found such a feverish following – 82.7 times covered in the institutional tranche alone, to say nothing of the over five million retail applications, also a world record.

“They’re basically all Greenfield projects, of which nothing has been built yet,” says René Mijné, head of equity syndicate for Asia at ABN Amro. “The plan is to build over the next three to four years a significant amount of power plants which will make it one of the largest power generation companies in India.” The group will develop, build and operate 13 power projects with a planned combined installed capacity of 28,200MW. Mijné says the reception demonstrates the strength of the Ambani name, but “the other half of the equation is that power is becoming more and more important, particularly in India and China. This played into that.”

There are other more pragmatic reasons too: India is unusual in posting on stock exchange web sites the levels of subscription for IPOs. That means that people can swiftly see if they are going to have to bid 10 times what they actually want in order to be fully accommodated with stock. Consequently 83 times coverage of the institutional tranche doesn’t actually equate to 83 times the demand. But this attracted everyone: buyers in Europe, the US and (particularly) across Asia; institutions, high net worth, and retail; financial institutions, mutual funds, insurers and hedge funds. “If you’re investing in India, the size of this IPO is a must have for a portfolio,” says Mijné.

For all its headlines, the IPO faced many challenges. Before getting off the ground it had to face legal fights with NGOs and minority shareholders annoyed about the carving out of assets from Reliance Energy, which is also listed. Those challenges delayed but did not derail the deal. Then there was the state of the markets: Sensex fell 8.9% between a week before the offering opened, and its close. When it did get away, the stock traded down after launch; the chairman has since committed to a bonus share issue to compensate investors for that drop, which analysts believe could cost him between $300 and $500 million on paper.

On top of that, rumours are flying about the treatment of the eight bookrunning lead managers, ABN Amro, Deutsche Bank, Enam, ICICI Securities, JM Financial, JP Morgan, Kotak Mahindra and UBS. It is understood they have not yet agreed a fee for the IPO, much less been paid it. Also, when the deal generated such huge cash demand, it was put into escrow accounts for two weeks, which generated millions of dollars of interest. Typically banks keep that (although the sums in this case are extraordinary), but are understood to have been asked to return it. The banks, in turn, are willing to return some of it, after subtracting some for the expenses of the deal. Bookrunners declined to comment, but someone close to the deal said: “The power of the group, and the other business that’s been done with the group, means that not a lot of people are willing to stand up and say: I need my money now. In fact, nobody wants to say that.”