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Indonesia: As Growth Heats Up, Buyouts Are Smokin'


For years, Indonesia has largely been a no-go zone for foreign investors. The country had boomed during the 1990s, but it fell hard and fast in the Asian crisis. The economy contracted by 13% in 1998, and foreign investment slowed to a trickle. Worse, terrorism such as the Bali discotheque bombing in 2002 made outsiders feel less than welcome. And widespread corruption meant few foreigners were willing to risk their money in the archipelago.

But the election last September of President Soesilo Bambang Yudhoyono seems to have broken the logjam. The latest evidence: Philip Morris International Inc. plans to pony up $5.2 billion for Hanjaya Mandala Sampoerna, Indonesia's third-largest manufacturer of cigarettes. Philip Morris, the maker of Marlboros and a unit of New York-based Altria Group Inc. (MO), on Mar. 14 announced it will pay Sampoerna's founding family $2 billion for its 40% stake in the company, and make a tender offer to shareholders for the rest. The deal "is a huge vote of confidence in Indonesia as a growing consumer market," says Baradita Katoppo, an analyst at Kim Eng Securities in Jakarta.

CLOVE ENCOUNTERS

The acquisition will give Philip Morris nearly a quarter of the world's fourth-largest cigarette market. The company has been in Indonesia for a half-century, but had captured just 4.4% of the market because it doesn't sell the clove-tobacco smokes that make up 92% of cigarettes smoked in Indonesia. Sampoerna has 19.5% of Indonesian cigarette sales with its clove smokes, called kreteks for the crackling noise the cloves make when burned. "To participate fully in the Indonesian market, you have to offer what the consumer wants," Altria CEO Louis C. Camilleri told reporters in a conference call after the sale was announced.

It's a safe bet that Indonesian consumers will want more cigarettes -- and just about everything else. The economy grew 5% in 2004 and is forecast to expand by 5.6% this year and by nearly 6% in 2006. Yudhoyono has said he wants sweeping deregulation and plans to boost infrastructure spending to unleash growth of 7% or more per annum by 2007. He has also taken steps to crack down on corruption and terrorism, while his landslide victory means he enjoys the authority to push through reforms and make them stick. "Until Yudhoyono took over, a big concern in Indonesia was political instability and terrorism," says Prasenjit K. Basu, director of Robust Economic Analysis, a Singapore consultancy.

The Sampoerna deal is just the latest in a host of recent acquisitions. In October, Standard Chartered Bank bought Permata Bank for $366 million. In February, Malaysia's Maxis paid $100 million for 51% of Lippo Telecom, Indonesia's No. 3 mobile company. In March, Hong Kong's Hutchison Telecom bought a 60% interest in Cyber Access, the No. 5 cellular operator, for $120 million. One big factor fueling deals is that Indonesia allows foreigners to buy 100% of companies in just about every sector of the economy. The Jakarta stock market is up 15% this year as investors have bid up shares of consumer product companies they believe might be bought by global giants.

Indonesia is particularly attractive as a cigarette market. Some 70% of men and nearly 20% of women smoke. Together, Indonesia's 230 million citizens consumed some 215 billion cigarettes last year. Smoking is permitted in offices, restaurants, bars, and in most public places. The country is also a good base for expanding throughout Asia. Indonesia is already a major exporter of tobacco to China, and Altria CEO Camilleri says the Sampoerna acquisition will help Philip Morris by giving it new brands and products. "We believe we can increase the consumption of kreteks elsewhere," Camilleri says. Indonesians would doubtless like to see their beloved kreteks exported throughout Asia. But the real good news in the Sampoerna deal is that it's a sign Indonesia is open for business again.

By Assif Shameen in Singapore


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