Indosat says no to Telkom merger plan

By Christiani S.A. Tumelap

JAKARTA (JP): Listed state-owned international telephone operator PT Indosat has opposed a plan to merge it with state- owned domestic telecommunications provider PT Telkom.

Company director for business development Safwan Natanegara said Indosat was not in favor of the idea because it would not be of any advantage to the company.

"We once agreed to the idea... We were assured it would create more value... However, after conducting a thorough study, we find it is just unacceptable," he said over the weekend.

He said the merger would certainly create a stronger telecoms company but it would reduce the value of Indosat, which would in turn give its shareholders lower returns.

An Indosat executive, who asked for anonymity, said concern over Telkom's huge debts was the main reason behind the management's rejection of the merger proposal.

"Indosat has a strong and much better balance sheet than Telkom... The merger would force us to also bear Telkom's huge debts... that would certainly damage our reputation in the eyes of investors and creditors," he said.

The idea of the merger was raised by Telkom, which argued that a merger was necessary to anticipate the planned liberalization of the country's telecommunications sector.

International call services will be fully opened to foreign competition in 2005 after Indosat loses its exclusive rights in the sector in 2004.

While new players in the fixed line telecommunications sector will not be able to enter the country until after Telkom's exclusive right as sole provider of the service expires in 2010.

The decision of whether or not to merge Indosat and Telkom is lies with the government. But the prospect of merging the two companies is slim if the government sticks to its initial plan of the two companies operating independently until Telkom's exclusive rights end in 2011.

The source said business restructuring might be better for Indosat in facing the era of free competition.

"We are transforming Indosat from only an international direct dial operator into a full network and service provider," he said.

Indosat, with total assets of Rp 4.8 trillion at the end of 1998, booked Rp 1.1 trillion in net profit in 1998, almost double the 1997 yield of Rp 640 billion. The company's market capitalization as of May this year reached at Rp 17 trillion.

While Telkom, which had total assets of Rp 23 trillion in 1998, booked a net profit of 1.16 trillion last year compared to Rp 1.15 trillion in 1997. The company's market capitalization as of May this year reached Rp 36 trillion.

Indosat has at least 26 subsidiaries and affiliated companies here and abroad operating in fixed line, mobile telecoms, satellite transponder leasing, international telecoms, value- added services and other sectors.

Company data show the firms yielded at least Rp 92.8 billion in 1998 and Rp 168 billion in the first half of 1999. The contribution of subsidiaries and affiliates is expected to almost double this year to reach Rp 206 billion.

However, a recent study by the Boston Consulting Group (BCG) recommended that Indosat refocus the portfolios of its subsidiaries and affiliates because many of them had not been generating good returns.

According to Indosat data, only a handful of the subsidiaries and affiliates yielded values higher than the cost of investment. These included cellular operators Telkomsel and Satelindo and fixed line providers Pramindo Ikat and MGTI,

The estimated value of Indosat's 35 percent stake in Telkomsel is between Rp 1.5 trillion and Rp 1.9 trillion, almost triple the company's initial investment of Rp 63.9 billion.

While the value of its 13 percent stake in Pramindo Ikat, which is one of Telkom's joint operation scheme partners, is estimated at between Rp 188 billion and Rp 225 billion, more than its initial investment of Rp 162 billion.

BCG has recommended that Indosat strengthen its current investments, particularly in local GSM cellular operators Telkomsel, Satelindo, international satellite transponder lessors Intelsat and Inmarsat, local multimedia and internet providers Indosatcom and Lintasarta, and local broadband network and content provider Metra.

It added that Indosat should gain a controlling stake in one local GSM operator, either Telkomsel, Satelindo or Excelcomindo Pratama.

Indosat recently said it planned to sell 6.5 percent of its 7.5 percent stake in Satelindo to acquire a new stake in Excelcomindo.

BCG also recommended that Indosat divest its stakes in firms of less strategic importance, such as local PCS/PCN-based cellular provider Primasel, international satellite-based telecoms operator ICO Global Communications Limited in London, international telecoms providers Camintel in Cambodia and Inkatel in Kazakhstan and value-added service provider USA Global Link Inc.

Indosat was also advised to divest its shares in local property firm Graha Lintas, finance company Kalimaya Perkasa, property firm Menara Jakarta and Intikom.

Indosat posted an unaudited consolidated net income of Rp 638.4 billion for the first half of 1999, a figure representing a 36.8 percent increase over the corresponding period in 1998.

The company's shares are listed on the Jakarta and Surabaya stock exchanges, while its American Depository Shares are listed on the New York Stock Exchange.