DealTalk: Consumption the new play in Indonesian M&A

By Joseph Chaney and Janeman Latul

JAKARTA (BestGrowthStock) – Indonesia, long revered among dealmakers as a land blessed with quality coal, gold, and other coveted natural resources, is likely to take on another identity soon as a hotbed for consumer and retail M&A.

Multiple factors are spurring increased spending habits in the world’s fourth most populous nation. Indonesian salaries have risen over a quarter in the last three years, the stock market (.JKSE: ) is booming, and the government aims to build much needed ports and roads to improve travel between its 17,000 islands.

Major U.S. retailers such as Wal-Mart (WMT.N: ) and Korean retailer Lotte Shopping (023530.KS: ), as well as local domestic private equity players such as PT Saratoga Investama Sedaya, are on the hunt for exposure to Indonesia’s consumption growth.

“For the past month, Korean supermarkets, French players, and Wal-Mart are all looking for partners to acquire so they can capture the domestic story,” said an Indonesia-based banker at a bulge bracket firm.

Bankers say deals currently in the works and at different stages of development include mergers and stake sales in retailers Matahari Putra Prima (MPPA.JK: ) and Ramayana Lestari Sentosa (RALS.JK: ).

There is also speculation that Michelin (MICP.PA: ) may buy out Southeast Asia’s largest tire maker Gajah Tunggal (GJTL.JK: ).

“We’re doing a strategic review with our banker and we expect to finalize the options for our hypermarket unit by the end of the month,” Benjamin Mailool, Matahari Putra Prima’s president director, told Reuters.

Wal-Mart, Lotte and Michelin were not immediately available for comment. Gajah Tunggal was also not available for comment, but in September it said it has no objections to Michelin raising its stake in the firm.

Ramayana’s finance director Suryanto said no decision has been made on any deal yet.

Matahari — which is asking for $1 billion for its hypermarket unit — has appointed Bank of America-Merrill Lynch (BAC.N: ) as its strategic adviser in the deal. The deal will eventually close, even after taking into account the seller’s high expectations and Indonesia’s tricky dealmaking environment, one banker said.

“The deal will get done and the valuation is high,” said a banker who is advising a potential buy-side client. “It will take time.”

BOOMING MARKETS, LINGERING RISKS

Investors have snapped up Indonesian stocks (.JKSE: ) and bonds over the past 18 months, attracted by strong economic growth fueled by domestic demand and commodities exports.

Consumer stocks are at the center of the action. Shares in Gajah Tunggal, a proxy for surging car sales, have more than quadrupled this year, outstripping the index’s 42 percent gain.

In early October, Indonesia’s PT Indofood CBP Sukses Makmur (ICBP.JK: ), the world’s top noodle maker, jumped as much as 15 percent on its trading debut as investors bought the stock to get exposure to strong Asian consumer demand.

Indonesia’s annual income per capita as of 2009 was 21.48 million rupiah ($2,391), according to the latest data from Indonesia’s statistic bureau, up from $1,942 in 2007.

Monthly average expenditure per capita for food in 2009 was 217,720 rupiah ($24.37), up from 193,828 rupiah in 2008.

Despite the bullish outlook, there are still plenty of risks for firms directly investing in the island nation. High on the list are bureaucratic red tape, corruption, and the importance of political connections, especially in the legal system.

French retailer Carrefour SA (CARR.PA: ) once struggled to find new locations in Indonesia, but is now expanding rapidly after Indonesia’s Para Group, which is politically connected and has banking, media and retail interests, said it aimed to raise more than $350 million from a global bond this year to buy a 40 percent stake in Carrefour’s local unit.

Domestic PE firms such as Saratoga look poised to cash in on the trend. It expects to raise up to $500 million in new capital next year by targeting newly-minted Indian and Chinese investors to pounce on opportunities in the consumer, infrastructure and shipping sectors.

“Current valuations on consumer-related companies are high compared to several years ago,” said Harry Su, head of research at Jakarta-based brokerage PT Bahana Securities.

“The difference is the buyer is willing to pay a higher price because Indonesia is on the investment radar now.”

($1=8931 Rupiah)

(Additional reporting by Aditya Suharmoko and Fathiya Dahrul; Editing by Neil Chatterjee and Muralikumar Anantharaman)

DealTalk: Consumption the new play in Indonesian M&A