SINGAPORE, Aug 11 — Temasek Holdings’ trouble-plagued bid to sell a stake in Indonesia's PT Bank Internasional Indonesia to Malaysia's Maybank holds a significance beyond the deal itself. More than just a transaction gone awry, it also reflects the changing realities facing the Singapore investment company.
The story of BII in Temasek's portfolio, in fact, says a lot about the shifts in its investment history over the last few years.
It will not be too much of an exaggeration to say that the road to Barclays and Merrill Lynch started with two Indonesian banks in the early 2000s. BII was one of the first major overseas investments by Temasek. Back in 2003, Temasek led a consortium called Sorak Financial Holdings, which also included Kookmin Bank, Barclays and Swiss-based ICB Financial Group Holdings, to clinch ownership of BII after reaching an agreement with the Indonesian Bank Restructuring Agency (Ibra).
Sorak paid 1.9 trillion rupiah (S$380 million at the time) for a 51 per cent stake in BII. The BII acquisition came just after Temasek and Deutsche Bank acquired a 62 per cent stake in another Indonesian lender, Bank Danamon, earlier that year.
Until then, Temasek's major investments had been mostly Singapore-centric. So BII, together with Danamon, marked the start of Temasek's overseas investments, as well as the beginning of its investments in foreign banks. Some questioned the acquisitions at the time, while others saw a political motive (buying the two banks, which were distressed entities restructured for sale by Ibra, was seen as contributing to Indonesia's recovery from the Asian crisis).
But there was also a clear commercial imperative: It was a genuine opportunity to buy financial assets at attractive valuations with the potential for strong returns — a theme that would run through to the present time.
Temasek went on to buy over Barclays and ICB's stakes in BII, and is estimated to have invested at least S$455 million in all in the bank.
Then came one of the regulatory shifts that have become all too familiar to Temasek. New foreign ownership rules under the Indonesian central bank's single presence policy, which takes effect by the end of 2010, meant that Temasek had to reduce its Indonesian bank portfolio by half.
Until late last year, the preferred option seemed to be a merger of BII and Danamon to meet the new rules. BII went as far as to say that it was drafting a proposal to merge with Danamon. The two banks complemented each other, said BII president-director Henry Ho.
Early this year, however, Temasek indicated that it was selling its BII stake. Eventually, an agreement to sell the stake to Maybank for US$1.1 billion was announced in March.
What led to the change of heart? First, it could be reflective of Temasek's growing caution, even disappointment, over the Indonesian market. The regulatory shifts and flip-flops in Indonesia, including that involving Temasek's telco investment Indosat, suggested that reducing its Indonesian exposure might be a prudent option.
At the same time, while the financial sector in Indonesia appeared healthy, critics have charged that it was vulnerable to a sudden reversal of fortunes because of the inflow of hot money into the stock market and the spike, until recently, in international commodity prices.
The second factor might hold some irony. If the path to Barclays and Merrill had started with BII and Danamon, then the decision to sell BII could also be traced to Temasek's push west-wards. Temasek's investments in Barclays and Merrill, beginning last year, signified a new global thrust beyond regional acquisitions.
That meant realigning the portfolio, and raising funds for new investments by disposing of existing assets. There could be one more reason at play: the billions pumped into Barclays and Merrill, while undeniably long-term in nature, are currently sitting on huge paper losses. It would be nice to book a profit somewhere, and the sale of the BII stake to Maybank would have yielded a useful S$1 billion, according to some estimates.
Of course, in the neighbourhood scheme of things, Malaysian central bank Bank Negara put the brakes on the deal last month. Apparently, it was worried that Maybank could suffer losses from overpaying (not unreasonable, given that the price is 4.7 times over book) for BII. It is still unclear how things would pan out, but as it is, it is a setback for Temasek.
It is now forced to revisit its options for BII, including merging it with Danamon. And if Temasek continues to put the BII stake up for sale, it is unlikely to fetch a price as high as the one Maybank was willing to pay, given the circumstances. Another lesson in the realities of investing in the region then. No wonder even ailing US and European banks look so attractive.
-TMI
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