Several days ago, Bakrie Telecom (BTEL) and Sampoerna Telekomunikasi Indonesia (STI) announced a collaboration in which STI would acquire 10% of BTEL shares (worth $90 million) and in return, BTEL receives 35% of STI shares which is currently owned by Sampoerna Strategic and Polaris with an option to be the largest shareholder of STI in the next 3 years. Business entity will be synergized under BTEL.

Michael Sampoerna as President Director of Sampoerna Strategic, owner of STI, cited by Kompas, stating that the reason for collaborating with BTEL is to increase its competitiveness in order to expand in the data communications infrastructure, which will become a trend in the future. In other words, rather than making a costly investment in this area (and Sampoerna is not sure that they would gain profit), it is better to go with other entity that is “more secure”.

Interesting that BTEL, which is not too healthy financially (suffered a loss during 2011), is doing a great corporate action through a merger with another CDMA operator. This is the second merger in the CDMA telecommunication industry since Fren, which consistently lost money, was taken over by Smart Telecom and now known as smartfren. Prior to that, Telkom had once explored the merger of its subsidiary, Telkom Flexi, with BTEL but the plan foundered because of disagreements from various parties.

On one hand, BTEL will acquire frequency 6.25 MHz on 450 MHz band that belongs to STI and will be used to penetrate into rural areas of Sumatra and Java which have been handled by STI under its Ceria brand. On the other, BTEL need to raise funds to finance this process.

According Seputar Indonesia, BTEL will issue new shares amounting to 10% (worth Rp 900 billion) that will be used to fund the acquisition and pay the Rp 650 billion debt that will mature this year. So who is actually spending the money?

To me, this is a financial engineering technique that always has been a skill of the Bakrie Group. Reuters’ headline actually said, “Sampoerna Group bought 10% of BTEL’s shares”. Now, the question is: is this merely a stock exchange or is Sampoerna actually investing (in the form of fresh fund) here?

Here is an article from Reuters dated March 1, 2012, two weeks before the announcement by BTEL and STI:

“The Bakrie group is looking to sell some equity via a non pre-emptive rights issue to raise money for Bakrie Telecom,” said the source. That method of fund-raising means the company does not need shareholder approval because the stake is within a 10 percent limit.

Bakrie Telecom will use the capital injection to pay back some of its debt, including 650 billion rupiah of bonds maturing this September, the source added.

The new partner will eventually buy up more shares and could become a majority shareholder in Bakrie Telecom with a 51 percent stake, one the sources added.”

If we use Reuters as the main reference, the chronology is as follows: BTEL needs to pay off debt and expansion and plans to issue 10% additional shares. Prospective buyers are Sampoerna and ST Telecom (Korea). Next came the official news of synergy between BTEL and STI.

Having Sampoerna, which is one of the wealthiest families in Indonesia, coming on board the ranks of BTEL owners, this surely will be an assurance that BTEL’s business will last and would convince investors that BTEL still has a bright prospect. In the past year, BTEL stock value had been falling with no sign of recovery.

Reuters’ article suggests that the investment (in cash) will not be done by BTEL but by Sampoerna in order to pay debt and facilitate the expansion. This new partner will even have the opportunity to become a new majority owner of BTEL. If the partnership is deemed beneficial by Sampoerna, it is not impossible that the story will probably turn the other way around.

Do not be surprised if in the next year or two, headlines will say that Sampoerna will be taking over ownership of BTEL. For us commoners, it may be difficult to understand something like this but in business with a lot of financial engineering play, it’s not impossible to do.