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.