ST Telemedia rides out Indonesian woes

The Straits Times, January 20, 2007
By Azhar Ghani, Indonesia Bureau Chief



Threat from class action suit and anti-competition allegations recedes

THE price Singapore's ST Telemedia paid for a 42 per cent stake in Indonesia's second-largest telecommunications company back in 2002: US$631 million (S$970 million).

The headaches that the deal brought came free.

Since becoming involved with Indosat, the subsidiary of Temasek Holdings has not been made to feel very welcome.

This, despite having taken the former state-owned Indonesian company far from where it was.

Although Indosat had a difficult year last year - first-half profits fell 30 per cent compared to the previous year - its mobile subscribers have almost quadrupled from 3.5 million in 2002 to 14.2 million. Revenue has also grown to 11.6 trillion rupiah (S$2 billion) from 6.8 trillion rupiah in 2002.

The latest gambit to oust ST Telemedia came at the end of last year when a labour union took it upon itself to champion, seemingly, the interests of consumers.

First, the Federation of State-Owned Enterprises Employees Union (FSP) filed a complaint with the country's business competition commission targeting Temasek, which also owns stakes in Indonesia's leading telecommunications provider PT Telekomunikasi Selular (Telkomsel) through SingTel's 35 per cent stake in the company.

Together, the two companies have more than 80 per cent of the mobile market.

According to the FSP, the Singapore Government investment vehicle violated Indonesia's competition law by manipulating the dominant market position of the country's two top mobile operators to fix prices and block rivals.

In particular, the complaint said the two Indonesian firms may have blocked a new entrant, Bakrie Telecom - which is controlled by the family of Indonesia's Chief Social Welfare Minister Aburizal Bakrie - from expanding in the market.

It also recommended that in order to prevent violations of the competition law, Temasek should be forced to divest its stakes.

Interestingly, the complainants conveniently forgot the fact that if their allegations were true, the Indonesian government - which owns 65 per cent of Telkomsel - was guilty as well.

Not content, the FSP followed this up by saying that it would also be filing a class action suit against Temasek for the alleged transgressions.

It also threatened to organise a mass street protest that would end with a blockade of Indosat's Jakarta headquarters.

Just to make sure that they were taken seriously, a leading member of the group told The Straits Times that the move against Temasek had the support of key legislators.

But he also inadvertently betrayed the group's real target when he said that they were really interested in ST Telemedia and its Indosat shares.

Such attempts to unseat the Temasek subsidiary - under various guises - are not new.

The Indosat deal ran into a political storm from the start.

Several hundred protesters marched in Jakarta following the 2002 deal, demanding inquiries into how the deal was done.

They ignored the fact that it was the result of an open- bid process monitored closely by not only representatives of the Indonesian government and its external advisers, but also by the International Monetary Fund.

Politicians, too, got in the mix, taking potshots at then state enterprises minister Laksamana Sukardi, branding him a traitor for selling a 'strategic national asset'.

The debate didn't stop at questions of nationalism.

Former president Abdurrahman Wahid, known for making controversial remarks in the past, accused government officials of taking 'commissions'.

He produced not a shred of evidence to back up this claim, and ST Telemedia strongly refuted his allegation. But that did not stop the rumour-mongers.

Things died down, but flared up again in late 2005 and early last year.

In what seemed like a rush of nationalistic blood to the head, the government made a baffling attempt to regain control of the company by buying back almost 41 per cent of the shares held by ST Telemedia.

By all accounts, it was a serious attempt: Vice-President Jusuf Kalla was involved in drumming up public support, and a letter of intent on the buy-back plan was sent by State Enterprises Minister Sugiharto to the Singapore company.

But as far as those who deal with numbers were concerned, it was a bit of a joke.

According to market analysts, Jakarta would have to raise at least US$2.5 billion (S$3.8 billion) to buy back 40.77 per cent of the 42 per cent stake held by ST Telemedia.

As there are no laws to compel the Singapore company to sell its shares, the government was expected to pay a premium above the traded price, which was then 6,100 rupiah per share.

Analysts said the amount needed would far exceed the US$1.2 billion which Jakarta said it planned to raise by selling government debt and getting state-owned companies to jointly buy the stake.

Suffice to say, that attempt faded away quietly.

Last year's attempt to unseat ST Telemedia came at a time when Temasek's South-east Asian expansion campaign ran into some serious trouble in Thailand with its Shin Corp deal.

Observers believe the Thai problem emboldened detractors of the Singapore company. These groups could also have been inspired by what was happening in both Bolivia and Venezuela, where nationalist governments threw convention to the wind and legislated government takeovers of strategic companies.

Yet there could be another factor.

At that time, among the deal-making community, whispers were going around of moves that could tilt the balance in favour of those who want to see ST Telemedia give up its stake.

One was that a politically connected Indonesian telecommunications company was in talks with a cash-rich foreign player to form a partnership.

The talk was that this partnership could be ready to bid for ST Telemedia's share once the right justification was found.

At around the same time, Russia's Alfa Group, which has interests in telecommunications and banking, said it planned to invest up to US$2billion in Indonesia, and was particularly interested in the telecommunications sector.

Alfa has had previous dealings with the Bakrie group, including a takeover of the latter's telecommunications interest in Uzbekistan in 2005.

Said an investment banker at that time: 'Put two and two together and I would be a little concerned if I were ST Telemedia, even if these were just rumours.'

If ST Telemedia was nervous, it hid it well.

But at least one executive betrayed some anxiety by expressing too keen an interest in getting a copy of a speech delivered by President Susilo Bambang Yudhoyono at an investment forum in October.

In the speech made at the Indonesian Regional Investment Forum, Dr Yudhoyono assured his audience - a number of whom were potential and current foreign investors - that Indonesia would not go the way of Bolivia or Venezuela and 'nationalise' privately held companies deemed to be important national assets.

Fortunately for the ST Telemedia executive, the talismanic powers of the copy of Dr Yudhoyono's speech was not put to the test - the pressure on the Singapore company died down just as it had in the past.

So far, there has been no news from the business competition commission, apart from an official saying it needs to clarify the complaints as some of the allegations did not make sense.

And on Monday, ST Telemedia announced a move that could work in its favour in the anti-competition allegations.

It announced a partnership with Qatar Telecom, which gave the latter a 25 per cent stake in Asia Mobile, the Singapore company's investment vehicle which holds ST Telemedia's stakes in Indosat and StarHub.

Worth US$635 million, the deal was touted as an alliance for both parties to seek out mobile telecommunications ventures in the fast-growing Asia-Pacific region.

Although ST Telemedia reaffirmed that it remains committed to Indosat - and StarHub - observers noted that the deal effectively dilutes its stakes in the Indonesian company, thus weakening any possible anti-competition case against Temasek.

The class action suit, too, fizzled out before it even took off: FSP postponed it almost as soon as it was announced, citing the need to garner more ammunition.

As the noises were dying down, the Indonesian government last month granted Bakrie Telecom, which currently operates only in some cities on Java island, a licence to operate nationally.

Said economist and political observer Umar Juoro: 'If you want to do big business in Indonesia, you must have the stomach to deal with the politics that are always not too far behind.'