Telkom says acquisition plan won't hurt earnings

Telkom says acquisition plan won't hurt earnings

JAKARTA (Dow Jones): Indonesia's state-owned domestic call
operator Telekomunikasi Indonesia said Monday its controversial
plan to acquire sister company PT Indosat wouldn't hurt its
earnings.

In an interview with Dow Jones Newswires, Telkom CEO Mohamad
Nazif said the planned acquisition could be financed from
existing cashflow, in contrast to current market talk of an
imminent rights issue and bond issuance.

"We can afford it through our existing cashflow," he said.

Despite opposition from Indosat, Telkom is lobbying the
government to sell its 65% stake in Indosat to Telkom in order to
create a national champion capable of competing with foreign
telecoms.

Nazif also said the company expects to come up with a solution
to a lingering dispute with its five foreign-owned operating
partners by March, when it holds an annual general meeting of
shareholders.

Among those partners is AT&T of the U.S., which owns 35% of
operating partner PT Ariawest. Nazif said Telkom was prepared to
offer its stake in cellular operator PT Satelit Indonesia as part
compensation for ending the partnership.

Telkom's handling of a lingering dispute with its partners has
cast a shadow over its future operations under Indonesia's newly
deregulated telecoms industry, which opens the door for foreign
investors to operate in the country.

Nazif said AT&T, as chief representative of Ariawest, has
suggested acquiring Telkom's 22.5% stake in Satelindo to help
settle their dispute, but said the two sides disagreed on the
total amount of compensation to be paid.

"The final payment terms with AT&T and Ariawest hasn't been
finalized," he said.

In addition to the Satelindo stake, AT&T has asked for Telkom
to assume around US$280 million in debt and pay some cash. In
response, Telkom offered to surrender the Satelindo shares and
pay $70 million in cash, according to Nazif.

Ariawest has previously threatened to take Telkom to court
over alleged breaches of its contract, which runs until in 2010.

It said these include failing to hike telephone tariffs in
line with an agreed formula, ceding management control and
maintaining exclusive rights to operate services in five
designated regions.

The other four operating partners, known as KSOs, are also
unhappy with their contracts.

Telkom expects to agree to a compensation package for PT Mitra
Global Telekomunikasi and PT Cable & Wireless Mitratel. The other
two will continue to work with Telkom, he said.

"They want to sell" their stake in the joint operations, he
said.

Mitra Global is part-owned by Australia Telstra Corp. Ltd.
(TLS) and Nippon Telephone and Telegraph Corp., while Cable &
Wireless Communications PLC of the U.K. owns 25% of Cable &
Wireless Mitratel.

However, Nazif declined to give details of Telkom's
negotiations with these partners, saying only that he expected to
reach different solutions for each partner.

Asked about plans to acquire Indosat, Nazif said Telkom can
afford to buy the government's shares in Indosat at a premium to
the market value.

"If the government offers it (Indosat) at a 20% premium to the
current price, we can afford that," he said.

He denied such a move would amount to a merger of the two
dominant players in the sector, saying that Indosat would
continue as a separate entity under Telkom.

Telkom has long insisted that combining its operations with
Indosat would create a strong national company and, at a stroke,
do away with the need to end cross-holdings between the two
companies.

But analysts say a marriage of the two companies could deter
much-needed foreign investment in the sector. It would also
breach Indonesia's pledge to the International Monetary Fund to
phase out cross-ownership and make Telkom and Indosat compete in
a deregulated market.

Indosat has outlined ambitious plans to spend up to Rp 15
trillion over the next two years to transform itself into a full-
service telecoms provider. Some analysts see this as a direct
challenge to Telkom that may stymie Telkom's plan to acquire its
smaller affiliate.

Denying that Telkom wasn't prepared to compete in a freer
market, Nazif said the company was already gearing up for a more
open industry.

"If the government rejects to sell (Indosat) to us, we are
ready to compete," he said.

Indonesia will end the state's monopoly on providing domestic
telecommunication services by 2003 and give a freer rein to
foreign operators.

However, Telkom executives complain that the government hasn't
agreed to compensate fully for this loss of monopoly and say this
has held up negotiations with KSO partners.

Shares in Telkom were up 1.2% to Rp 2,175 midday Monday, while
Indosat was unchanged at Rp 9,200.