Japan's Indonesian ambitions

It should come as no surprise that large cap deals in Indonesia are coming in at stellar valuations. It has been the way for at least the last two years as foreign investors cottoned on to the latest growth opportunity in emerging Asia.

Just within a private equity context, who could forget the 20x EBITDA The Carlyle Group was at one point apparently willing to pay for a minority stake in GarudaFood? Or the offers of 19-20x EBITDA private equity bidders were mulling for between 20% and 49% of hospital chain Siloam last year - while the seller, the Riady family-controlled Lippo Group, had 25x in mind?

Neither is it surprising that a Japanese strategic investor is writing the big check. Indonesia has seen $9.9 billion in financial services M&A across 84 deals since 2011; Japan accounts for 13 of these transactions, worth a collective $1.9 billion, according to Thomson Reuters. And then consider that $7.2 billion of the overall total was DBS' bid for Bank Danamon, which was facilitated by its part owner, Temasek Holdings.

Strip out that deal and the BTPN represents the largest investment in the sector, followed by Mitsui Sumitomo Insurance's purchase of a 50% stake in MS&AD Insurance Group Holdings for $819 million. Marubeni Corp, Tokio Marine Holdings, Hitachi Capital Corp, Mizuho Bank and SBI Securities have also struck smaller financial services deals in Indonesia since 2011.

There is a rationale behind these investments: Japanese financial services conglomerates want to increase their exposure to emerging markets in the region and a combination of a (until recently) strong yen and low borrowing costs has supported these efforts.

In BTPN, SMBC will have an interest in Indonesia's seventh-largest bank by market value. The lender claims to have grown assets, deposits and capital fivefold in the last five years, and there is room for further expansion given that only 40% of the country's 240 million population have bank accounts.

For the principal sellers, TPG Capital and Northstar Pacific Partners, the deal represents a significant windfall. Their investment vehicle, TPG Nusantara (TPGN), bought a 71.6% stake in BTPN in 2008 for around $200 million. The holding has since been diluted to 57.9%, but SMBC will take 16.9% of it for $659 million; once the Japanese group receives approval to buy the full 40%, it will buy another 15.7% from TPGN for $528 million. That implies a money multiple of at least 6x and 25% still to exit.

From SMBC's perspective, there is a benefit to buying from private equity investors. Quizzing those who have advised on foreign M&A in Indonesia's financial sector brings forth a litany of frustrations. Often putative local sellers are just testing the market, under no pressure to do a deal but interested in seeing how much they could get if they tried.

In one more extreme instance - nevertheless seen as a fair reflection of the whole - a Japanese firm entered into exclusive negotiations with a local player only to discover in short order that its target was continuing talks with other parties. The deal fell apart but within months the putative Japanese investor was back at the table, ignoring warnings that its local counterpart couldn't be trusted. Anything for a slice of the Indonesia story.

At least when acquiring from foreign private equity investors, there is more common ground and therefore greater certainty - even if the valuation is lofty.

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• Topics
• North Asia
• Southeast Asia
• Buyouts
• Financials
• Indonesia
• Japan
• Mizuho Capital
• buyout
• Sumitomo Mitsui