[Kabar-indonesia] Merrill Lynch arranges buyout of Indonesia's fourth largest coal miner

[JoyoNews at aol.com]

FinanceAsia.Com
Wednesday, August 2, 2006

Merrill Lynch arranges buyout of 
Indonesia's fourth largest coal miner

By Anette Jönsson

The US$279 million deal is financed through a privately- placed
two-tranche loan structure which gives investors a right to 30% 
of any future equity upside.

Merrill Lynch has completed another privately placed off-market
investment banking transaction in the form of a $279 million buyout of
Indonesia's fourth largest coal miner, Berau Coal. The acquisition is
financed through a two-tranche high-yielding loan that was said to
have attracted just under 10 investors.

The highly complex transaction, which is believed to be the first
private sector unlisted buyout involving multiple investors in
Southeast Asia, centres on the clean-up of a messy ownership
structure. The aim is to make the company more efficient with regard
to its operations. Berau, which is currently stretched to the limit
with regard to capacity, plans to expand production to meet the
growing demand for coal from power producers and to improve its
marketing.

What Merrill has done is essentially to raise the money needed for one
of the existing shareholders - Indonesian individual Rizal Risjat
- to increase his stake in the company to 90% from 9.3% and to ensure
the smooth exit of the other owners. Ten percent of the company will
remain in the hands of Sojitz, a listed Japanese trading and
investment company.

To ensure sufficient interest from investors, who do foot the entire
bill for this buyout, the mezzanine tranche is structured to give them
30% of the potential future capital gain when the new owner sells out.
As an additional protection, and to ensure a reasonable investment
horizon for the participating investors, they will get a guaranteed
internal rate of return of 20% if there is no qualifying exiting event
(an IPO, a trade sale, a high-yield refinancing etcetera) within two
years.

Depending on what exit route is ultimately used, investors can likely
expect between 10% and 25% returns on this investment, people involved
in the transaction says.

"Particularly with regard to the mezzanine tranche, the deal is
structured to align Rizal's interest with that of investors' from the
perspective that he is motivated to sell at the highest price and they
get a share of that," one person says. "They get a good fixed- income
return, but it's the additional equity upside that will get them over
the line (in terms of the potential for above market returns)."

>From an investor point of view, the transaction comes at the right
time given the present bullish view on coal and the commodity boom.

There is also a strong preference among investors for US dollar-
denominated and export-oriented companies in the commodity space in
Indonesia - a category which Berau fits into after being founded by US
oil major Mobil Oil in the 1980s.

Since then the company has changed owners several times before ending
up being controlled by a group of five or six different parties,
including four Indonesian parties, one US investor and a Tokyo-listed
company. The entire ownership structure before this deal, however,
included three layers of direct and indirect owners, some of whom
could lay claim to the company only through their holdings of call
options, which explains why no fewer than 15 legal firms were involved
in various parts of this buyout transaction.

Making the transaction even more complex, it also had to deal with
outstanding options that had to be unwound, share pledges, default
warrants and competing buyers for the assets, not to mention the sharp
correction in global equity and emerging debt markets while
negotiations were ongoing. Merrill is said to have been working on the
deal for more than four months.

The complex ownership is likely to have contributed to the company's
inefficient operations and a cost structure that in some areas is well
above the industry average. For one, Berau's extraction costs are
approximately $19 per tonne, which compares with between $12 and $17
for most of its competitors.

"This means there is significant upside under the new management to
cut costs," says one observer, who notes that investors also bought
the story based on the company's bluechip client list, which includes
names like Korea Midland Power, Malaysian power producer Tenaga,
Guangdong Power and Hong Kong's CLP Power.

With the production expansion now forecast, there should also be
significant upside to the company's earnings once its house is in
order, he adds. This year, Barau is expected to generate EBITDA of $70
million from the production of 11 million tonnes of coal.

The new owner won't be involved in the day-to-day operations himself,
but has brought in a new Indonesian CEO with experience in the
country's coal and commodities industries. The company is also looking
to identify foreign talent to come in and run the mining and coal
production operations as well as the marketing efforts.

According to people involved in the deal, the price tag on the
acquisition corresponded to 3.6 times the projected 2006 EBITDA, which
compares with an EBITDA multiple between five and eight times for most
publicly traded coal assets globally. In the US, coal companies tend
to trade at even higher forward PEs of eight to 10 times.

Aside from the acquisition cost, the $297 million that Merrill raised
for the new owner also covered one year of pre-funded interest for the
debt facility now put in place, as well as some other expenses.

The funds raised were split into two parts. The smaller tranche is a
$39.5 million three-year senior loan, which will pay 400bp above Libor
and which will primarily be used to retire an existing US dollar loan
and bring down the company's existing cost of debt. The second tranche
consists of $239.5 million of two-year mezzanine debt in the form of a
so-called "cells" (a collateralized equity-leveraged loan security).
This portion will pay Libor plus 800bp and will carry the rights for
investors to get part of the equity upside in case of a future sale or
listing of the company.

Most of the participating investors bought into both tranches. The
type of investors represented was said to have included "highly
sophisticated" players who have been involved in Indonesia both during
and after the financial crisis and who understand the risks - for
which, read hedge funds. However, according to the people involved,
the group comprised a mixture of equity and credit accounts, as well
as investors specialising in coal assets.

Merrill Lynch has been quite active with regard to privately placed
transactions over the past 12 months, including a $150 million pre-
IPO convertible bond that it arranged for Golden State Environment
Group Corp, a mainland water supplier and waste treatment company, in
July. In December 2005 it completed a $151 million pre-IPO CB for
Indonesian specialty chemicals group PT Sulfindo and in early May it
wrapped up a privately placed highly structured deal that raised $500
million for a leveraged buyout of Hong Kong-listed Asia Aluminum by
its chairman.

Representatives for the US investment bank say these type of
transactions, which tend to pay higher fees, are doing wonders for its
P&L account. And on the equity side, its simultaneous slip in the
league tables, which some rivals suggest may be the reason for this
new focus rather than the result, should be cleared up later in the
year as Merrill will act as one of the bookrunners for ICBC's upcoming
IPO, they argue.

ICBC looks set to become one to the world's three largest listings
ever, and if it goes ahead with a dual A-share and H-share it could
even be the largest.
According to a banker not involved in this deal, hedge funds in
particular are extremely keen on private deals like this one because
of the potential for higher returns and have to a large extent already
taken over from private equity funds as a primary source of funding
for unlisted companies.

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Joyo Indonesia News Service
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