Friday, February 24, 2006

UFS Buying PT Kiani Kertas
Got More Than UFS Bargained For

United Fiber System Ltd is a listed company in Singapore. It had the guts and gumption to consider a takeover of PT Kiani Kertas, a company once controlled by Suharto's ex-son-in-law Prabowo Subianto. Back in August 2005, UFS appointed Deutsche Bank as its financial advisor and financing arranger for the deal. (For a totally different case but also involving Deutsche Bank and co-starring Indonesian / Singaporean companies, please read blog on Deutsche Bank vs Beckett).

Johnathan Paul DB's Co-Head of Global Banking, Asia-Pacific said at the time, "We believe the proposed investment opportunity will further enhance the development of UFS into a key player in the international pulp market...". On 25 June 2005, UFS signed a Letter Of Intent with Kingsclere Finance Limited to buy a majority stake in PT Kiani Kertas and on 25 July 2005 UFS had entered into an Operational Management Agreement with PT Kiani Kertas to operate the pulp mill while the transaction is in progress. That LOI was amended last month when UFS took on the exclusive sale and purchase agreements between Kingsclere Finance Limited and the vendors of Kiani Kertas to acquire 100% interest in Kiani Kertas. Kingsclere had entered into the exclusive sales and purchase agreements with the owners of Kiani Kertas on 5 December 2005.

However, DB has quit as adviser on the takeover amid pressure from environmentalists concerned at the fate of Borneo’s forests. In stepped Merrill Lynch to replace DB as the funder and co-buyer under the consortium led by UFS. The withdrawal by DB could actually lead to a collapse of the proposed acquisition, as other investment banks may be unlikely to replace it for fear of attacks by environmental campaigners.

Speak of the devil, just yesterday, Merrill Lynch has decided against funding UFS also. That means it is the third investment bank to turn down UFS after rejections from DB and JP Morgan.

The problems surrounding PT Kiani Kertas also highlight Indonesia’s struggle to overcome the legacy of three decades of rule by former president Suharto, as the company is owned by a consortium led by a former son-in-law of the one-time strongman.

The environmentalists argue UFS should cancel plans to build a new wood chip mill and pulp mill in addition to the existing Kiani Kertas facility, as this would place too much pressure on Borneo’s diminishing natural rainforests.
UFS argues the project has a 10-year supply of sustainable wood, but the campaigners maintain that the combined facilities would have capacity far in excess of available existing sources of plantation timber, creating an incentive to clear more natural forest for plantation.

Upon completion of the acquisition (assuming UFS can find a funder for the deal), UFS will pay US$220 million to the vendors of Kiani Kertas in the form of a combination of cash, zero coupon mandatory convertible bonds maturing twelve (12) months after completion and promissory notes issued that are to be redeemed over thirtythree (33) months. The Kiani Kertas mill is a large scale modern plant with an annual capacity of 525,000 tonnes.

The state-owned PT Bank Mandiri said that it has no plans to cut the debt of paper company PT Kiani Kertas. "We still want investors who want to take over Kiani to repay at least US$201 million plus US$13 million in interest," Ekoputro Adijayanto, the bank's spokesman said. Adijayanto said Bank Mandiri would only consider bids for Kiani Kertas of at least US$201 million. His statement came after a Singapore Straits Times report in Singapore which quoted Adijayanto as saying that Bank Mandiri may consider forgiving part of Kiani Kertas' US$201 million debt.

Now UFS is apparently working with ANZ to see if they can come up with the funds. The funny thing is that ML decided not to fund the deal but is apparently still in the consortium with UFS to buy PT Kiani Kertas - ok to buy, not ok to fund??!! The other interesting thing to come out from this adventure is the role played by JP Morgan - JPM pulled out after clashes with UFS' major shareholder on environmental issues - gee, looks like you can make a billion dollars and still be a good corporate citizen - ok JPM, come and take me public anytime, man.

At the end of the day, it also looks like UFS is a wee bit too small to attempt such a takeover. The fact that operating results for existing busineses under UFS have been bland for the last 2 years also do not bode well. Plus the fact that this is a politically-charged company. The fact that UFS have had to go through rejection after rejection for funding shows a lot of (lack of) pre-planning and naiveness in investing in Indonesia. ... (go on, go on now.. go back to the kiddy pool).

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