Citi Downplays Indosat Merger After Rumor-Driven 100% Rally

(Bloomberg) -- The stock has doubled in a month on deal speculation. Citigroup Inc. says a merger would make no sense for Indonesia’s PT Indosat.

Here’s the rationale: Consolidation makes sense if it grows revenue, helps with cost savings or creates competitive advantage, analysts Arthur Pineda and Hussaini Saifee wrote in a note. In Indosat’s case, where rumors have recently focused on a combination with PT Smartfren Telecom, that wouldn’t bring any of the three, Citigroup said.

Deal speculation has been rampant in Indonesia, and Communications Minister Rudiantara, a former telecom executive himself, said on Friday that consolidation “is a must” to make the industry more efficient, according to a Detik.com report. Last month, rumors of a deal with Vietnam’s Viettel Global Investment JSC sent Indosat shares for a wild ride and got denied.

Speculation about a Smartfren deal emerged after it raised 6.7 trillion rupiah ($478 million) through a rights offer in October. Its shares have surged 190 percent this year, making it the nation’s largest telecom company by market value after PT Telekomunikasi Indonesia Persero.

Citigroup notes that Smartften is a “materially” loss-making operator that generates just a fourth of Indosat’s mobile business revenue and whose network coverage overlaps with it. The brokerage highlights that the absence of a favorable regulatory spectrum framework is another drawback to a merger. Telekomunikasi Indonesia and PT XL Axiata could “benefit more” if consolidation does happen, Citigroup says.

“We see talks of mergers/acquisitions as speculative and merits & likelihood of a merger as low until regulations change or a better potential partner comes along,” Pineda and Saifee wrote in the note, keeping a sell recommendation on Indosat. “Losses, on the other hand, are forecasted to persist through FY20 with elevated capex weighing down on expenses.”

Indosat President Director Chris Kanter didn’t respond to a phone call and text message seeking comment on the merger speculation. Smartfren President Director Merza Fachys declined to comment, although said the company remains “hopeful that consolidation within the industry could materialize this year to make it healthier.”

Qatar’s Ooredoo QPSC has a 65 percent stake in Indosat, while Smartfren belongs to Sinarmas group.

--With assistance from Fathiya Dahrul.

To contact the reporter on this story: Harry Suhartono in Jakarta at hsuhartono@bloomberg.net

To contact the editors responsible for this story: Divya Balji at dbalji1@bloomberg.net, Cecile Vannucci, Margo Towie

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