CLSA Delta Dunia, rights issue + Berau acquisition

After a roller coaster ride and lots of market chatter on M&A, Delta Dunia released an official statement last night. Delta announced plans to do a share swap with Recapital and do right issue to acquire Berau Coal. Rights issue is around US$1.1bn (market cap is US$

The funds raised through the rights issue will be used to buy an exchangeable bonds from Recapital which will be swapped into shares of Berau Energy next year around Arpil 2011. Conversion price will be announced at a later time. Berau is a good asset, the fifth largest coal producer in the country and will most likely help Delta to secure more deals from KPC and Arutmin.

Key highlights:

The potential deal is complex, requiring investors to subscribe to the rights without full picture on acquisition price for Berau. Note also that rights proceed will be used to subscribe mandatory exchangeable bonds, issued by Recapital, exchangeable to Berau Energy shares in 12 months.
Recapital could become a significant shareholder of Delta Dunia, hence there is a potential change in control. Whether there will be a change in management would remain to be seen.
The plan to use Berau IPO price as reference for acquisition, might minimize question on pricing. Note also the rights issue is priced at Rp1,400, hence Recapital is buying Delta Dunia at the same placement price in end of last year.
We would like to point out is that Berau Coal has a good coal asset, given its sizeable reserves and production and decent profitability.
Recapital, given its relationship, might also be able to help Buma securing a bit of more works for Bakrie Group’s coal mines that include KPC, Arutmin, or other coal mines like Pendopo and FBS.
Our concerns, however, centred around potential change in control at Delta Dunia and change strategy from contractor to mine owners.
We are still reviewing our recommendation on the company.