The company held an analyst briefing today, with CEO and CFO presenting while vice president commissioner, representative from Northstar also joining though a conference call. Note that Management will hold an investor conference call next week. Key takeaways from the meeting are as follow.
The company is looking to acquire between 51% to 80% stakes in Berau Energy. This would be post IPO stakes or the enlarged capital of Berau Energy. The aim is to secure around 60% to 80% in Berau Energy.
Pricing of Berau deal remains unclear. While IPO price for Berau Energy would be used as reference, management is currently still negotiating various pricing alternatives if IPO is not proceeding as planned. There will also be mechanism to transfer some of the rights issue fund back to Delta Dunia should the company needs less than US$1.1bn for the deal.
There is no clarity as the size of debt that would be carried in Berau Energy book. Recapital, reportedly, raised a total loan and vendor financing amounting to US$1.2bn in order to acquire Berau Coal. We also understand that Berau is in process of issuing bonds to refinance portion of this loan.
Northstar is unlikely to subscribe to its rights portion. Northstar said that it does not have the full funding to subscribe and is likely to see its stakes diluted.
The deal is unlikely to trigger a general offer despite the change in control. Note that the transaction would be done through rights issue mechanism.
Time-table for the deal is as per below. Note that for the whole transaction, rights issue and to go through, the EGM will need to have, at least, 2/3 of shareholders attending, with at least 2/3 of the attendance approving.
Figure 1
Deal time table
Due diligenceEarly April 2010
MEB issuanceEarly May 2010
Submission to BapepamEarly May 2010
EGMMid June 2010
Closing of rightsMid July 2010
Payment MEBMid July 2010
Berau IPO End of July 2010
MEB conversionEarly April 2011
Source: CLSA Asia-Pacific Markets
Key rationales for Delta Dunia to do the transaction, as presented by management, are 1) to secure more contracts from Berau Coal as the mine is planning to double its outputs post changes in control and 2) the deal would align Delta Dunia with
Bakrie Group that owns some of the biggest coal mines in Indonesia. The latter is, effectively, a confirmation that Bakrie Group will have greater influence in Delta Dunia going forward.
Interestingly, CEO of Delta, Mr. Hagianto Komala, who used to be CEO for United Tractors, also mentioned that the trend is for concession owner to control a greater share of production as indicated by Adaro Energy and Bumi Resources. He thought that there is more production upside in Berau Coal, believing that multiple changes in Berau Coal ownership over the past seven years have resulted in slower-than-peers-growth.
We remain sceptical that acquiring controlling stakes in a coal company is the right way to go. We believe that if the company is focusing to be a dependable independent contractor, delivering growth for customers, then there is less reason for coal concession owners not to give more contracts. It might be cheaper, in our view, for
Delta Dunia to acquire minority stakes in various coal mines, Greenfield or developed ones, to secure future contracts in those mines. Furthermore, the potential deal entails risk for Buma to dilute its franchise as an independent mining contractor.
As we put out in our note yesterday, our concerns continued centred around potential change in control at Delta Dunia, with potentially stronger Bakrie Group influence, and change strategy from contractor to mine owners. We understand that given uncertainty surrounding this deal, it is difficult to expect share price to perform.
We are still reviewing our earnings forecasts and recommendation on the company as details are not yet available.
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