Deal of the year: Maxis Communications

Euromoney magazine, February 2008

Deals of the Year

Maxis Communications US$7.1 billion privatisation financing and MR20 billion take-out

(ABN Amro, CIMB)

Ananda Krishnan had a problem.

The Tamil Malaysian billionaire has investments from satellite TV to gambling, but at the heart of his empire is Maxis Communications, Malaysia’s largest cellular telecoms company, which by the middle of last year he held a 70% stake in. Maxis, dominant in the near-saturated domestic cellular market, clearly needed to go overseas to grow, and was doing so through bold expansion in India and Indonesia. But shareholders just weren’t sharing the vision: every new announcement of expansion was denting the share price. The market wasn’t valuing Maxis at anything like the level Krishnan thought appropriate.

The best answer: take the company private, spend money on capex rather than dividends so as to expand overseas for a few years, and then maybe relist in the future. But doing so would require a transaction on a scale never before attempted in Malaysia.

The deal itself, a RM39.8 billion  (US$11.7 billion) public to private trade, was Malaysia’s largest ever corporate transaction and the largest buyout in ex-Japan Asia. And that’s only part of the story. Malaysian regulations required that funds be committed to underwrite the deal before making the offer. Doing so required US$7.1 billion of commitments. “It would have been impossible to do that onshore in Malaysia,” recalls Neil Galloway, head of M&A and equity capital markets for Asia at ABN Amro, which with local house CIMB was advisor to BGSM, Krishnan’s acquisition vehicle. “It would have needed the entire Malaysian banking market in aggregate to have underwritten this, and even then they wouldn’t have got there.” So it had to be structured offshore, which ABN Amro did as sole underwriter: the largest ever financing package in Malaysia.

The advisors timed the deal to take place during a week with three public holidays in it, giving it the flexibility to suspend the stock for longer than the usual single day in order to complete due diligence and put the financing in place. All told, it went from mandate to financing in 10 days.

With the deal done, the next big challenge was to refinance the bridge. It took a while – the deal’s size, coupled with the credit crunch, made that inevitable – but the startling thing about it was that almost all the refinancing was achieved onshore, in a deal that made a striking demonstration of what can be achieved in Asian local currency debt markets. (It was also made clear that Bank Negara Malaysia, the central bank, wanted it done this way in order to avoid a multi-billion dollar hit to foreign exchange flows.)

RM 12 billion of it (US$3.6 billion) went in a single bond, the largest ever Malaysian bond issue  – and, in a fillip to the emerging sukuk markets in Malaysia, was Shariah-compliant as well. Alongside this came a RM3 billion (US$900 million) junior bond tranche, fully subscribed by Krisnhan and by Saudi Telecom, which had since come in to purchase 25% of the now-private company in another interesting twist to the deal. The junior tranche was the largest ever corporate hybrid capital issue in Asia; better still, it acted as equity capital for rating purposes, allowing the senior bond tranche to achieve a local investment grade rating of AA. Any lower and it probably would never have sold. A US$1.2 billion term loan completed the refinancing ($1 billion of the bridge, designated for capex, was ultimately not used).

The refinancing had taken almost exactly six months.

Saudi Telecom’s appearance as a shareholder came quickly after the company went private. It would have been difficult for it to come in in any meaningful way previously because of foreign ownership restrictions on listed Malaysian companies, and because of the dilution it would have caused Krishnan. The move demonstrated growing ties between Middle Eastern and Asian enterprises, and gives Maxis greater strength to grow overseas. India will be the priority, where Maxis owns a 74% stake in Aricel, which has a strong presence in the south and east of the country but hopes to become a truly pan-Indian telco.

This was a deal that had significance whichever way you looked at it: the record-breaking scale of the buyout, financing and refinancing; the demonstration that companies don’t need listings and equity funding in order to grow; a recognition that foreign partners can make a constructive contribution to Malaysian business, and that those partners will increasingly be from the Middle East; the maturity of the Malaysian corporate market; the possibilities now available in local currency Asian debt; and the role that Shariah-compliant securities can play in mainstream corporate finance. “Three years ago you couldn’t have done this equity-into-debt play because the markets in Malaysia were not deep enough,” says Teik Leng Yeoh, who heads ABN Amro’s structured finance business in Malaysia. Galloway is more blunt: “Other international banks were going to be involved in this and walked away because they didn’t believe it could be done.”