Occluded by the Merrill Lynch headlines, an Indonesian riddle

The joke going round was that the atrial flutter that Lee Kuan Yew suffered over the weekend was caused by news of Merrill Lynch's near meltdown. An atrial flutter is a cardiac condition when the upper chamber of the heart fails to beat properly.

Singapore's sovereign wealth fund Temasek Holdings had invested US$5.9 billion in Merrill Lynch since last December. Temasek is headed by Ho Ching, Lee's daughter-in-law.

In late April this year, Lee had stoutly defended both Temasek's decision to invest in Merrill Lynch and the Government Investment Corp's decision to invest in troubled UBS bank. "The franchise of the banks, the expertise that they have, under proper leadership, they will be able to recover and rise again," Lee said in a Bloomberg Television interview. [1]

As recently as end August 2008, the "franchise" word was still being used.

After getting US regulatory approval to raise its stake in Merrill Lynch from 9.4 to about 14 percent, Temasek's international senior managing director Michael Dee reaffirmed their confidence in the investment bank. Merrill Lynch had a "great franchise, which has existed through many crises through a long period of time," he said. [2] 

Two weeks later, it was one crisis too many, and that "great franchise" may be no more, except at best as a division of Bank of America.

With the collapse of Lehman Brothers, Merrill Lynch suddenly looked almost as shaky. It had reported some US$52 billion in write-downs but people still weren't sure how much more troubled assets remained.

Merrill CEO John Thain ran quickly to Bank of America, which agreed over the weekend to buy Merrill Lynch for a total of US$50 billion in an all-stock deal. The price represents US$29 per share, about 70 percent higher than its Friday closing of US$17.05, a premium some people find hard to understand. [3] 

At least, at this price, Temasek does not face a loss, having paid "an average price of US$23.11 a share based on Bloomberg calculations from exchange filings." [4] But see update in box on right.

Temasek first poured capital into Merrill in December 2007, injecting some US$5 billion between December and February at US$48 a share. In mid 2008, after reporting more write-downs, Merrill went hat in hand to its shareholders for more capital. Since by then Merrill's share price had dropped substantially, a "reset" clause in Temasek's original purchase agreement kicked in. This "reset" clause basically said that if within 12 months of Temasek's first capital injection, Merrill issued new shares at a lower price, then Temasek would be compensated for the difference.

On this basis, Merrill returned US$2.5 billion to Temasek, which the latter reinvested in the bank, together with an additional US$900 million new capital. The sum was used to purchase US$3.4 billion more of Merrill stock at US$22.50 a share [5]. That gave the Singapore company the 14 per cent stake as mentioned above, making it Merrill's largest shareholder for a short while.

What Temasek intends to do now that Bank of America plans to take over Merrill Lynch, remains to be seen. In any case, the buy-out is subject to shareholder approval on both sides, so there may be more twists and turns yet.

* * * * *

 
Completely overshadowed by the Merrill near-death experience was another news item related to Temasek just before the same weekend. It lost its appeal in the Indonesian Supreme Court.

Temasek Holdings Pte, a Singapore state-owned investment company, lost an appeal against an Indonesian ruling that it violated the nation's anti-monopoly laws, Supreme Court Chief Justice Bagir Manan said.

The court upheld a ruling by the competition regulator, which said Temasek breached antitrust laws by using indirect stakes in PT Telekomunikasi Selular, known as Telkomsel, and PT Indosat to fix prices.

-- Bloomberg.com, 12 September 2008, Temasek Loses Indonesian Anti-Monopoly Ruling Appeal (Update2)

 
However, this decision may now be moot, as one of the two cellphone operators at the centre of this case was sold off to Qatar Telecom 3 months ago.

But let's start from the beginning:

In November 2007, the KPPU, Indonesia's Business Competition Supervisory Commission, fined Temasek and its subsidiaries and associate companies 25 billion rupiah each (about US$2.7 million) and required that it dispose of shares in Indosat or Telkomsel no later than two years after the verdict had come into permanent legal force. Even that divestment was subject to the condition that buyers were only allowed to buy a maximum of 5 percent of the total of disposed shares. Naturally, the buyers could not be affiliated to Temasek, KPPU ruled.

Temasek challenged the ruling in a Jakarta court. It lost that round too.

The Central Jakarta District Court on Friday upheld KPPU rulings against Temasek Holdings and subsidiaries for an antitrust violation, but revised the penalties.

"Since the KPPU (Business Competition Supervisory Commission) is the only commission in this country able to sentence businesses for uncompetitive acts, it should have been able to prevent such monopolistic practices from occurring in the first place," judge Andriani Nurdin told the appellate court.

"It is in this court's opinion, then, that its sentence for Temasek and its subsidiary companies is too harsh," he said.

The judges gave Temasek Holdings a choice to relinquish at least 50 percent of its shares in both PT Telkomsel and PT Indosat Tbk or let go all shares in either company within one year as ordered by the KPPU.

Judges added that the divested shares could be sold for up to 10 percent to each buyer, higher than the maximum of 5 percent mandated by the KPPU.

Judges fined Temasek and eight subsidiaries, plus the largest market shareholder Telkomsel, Rp 15 billion (US$1.6 million), which was less than the Rp 25 billion fine set by the KPPU.

-- Jakarta Post, 10 May 2008, Court lessens punishment for Temasek

 
However, a month later, on 8 June 2008, Temasek subsidiary Singapore Technologies Telemedia (STT) announced that it would sell its entire 40.8 percent stake in Indosat to Qatar Telecom for US$1.7 billion. STT had bought the stake in 2002 from the Indonesian government (then under President Megawati) for US$631 million. [6] 

All that remains after that disposal is Temasek's indirect stake in Telkomsel. Except for the fines, which I suppose, still have to be paid.

What was really interesting to me was that:

The Supreme Court scrapped two clauses in an earlier ruling that prohibited Temasek from selling its holdings to affiliate companies and restricted each buyer to a maximum 10 percent stake, court spokesman Nurhadi said.

That removed any legal obstacle to the sale of the Indosat stake to Qatar Telecom, said Ananda Lukmansyah Sjarkawi, an analyst at PT Andalan Artha Advisindo Sekuritas. "There shouldn't be any problem now with the stake sale" because of the Supreme Court's decision to ease those restrictions, he said.

--- Bloomberg.com, 12 Sept 2008, Temasek Loses Indonesian Anti-Monopoly Ruling Appeal (Update2)

 
Isn't that rather mysterious? Qatar Telecom seemed confident enough back in June that the eventual ruling would go like this, and that they would not subsequently have to divest their new 40.8 percent stake in 10 percent portions. They were so confident that it was even stated when they bought the stake from STT that the sale was irreversible, whichever way the Supreme Court decision would later go.

How could they be so sure? Is there more to it than what's reported? In the weekend when the news, even here in Singapore, was all about Lehman Brothers and Merrill Lynch, that one little mystery remained.

© Yawning Bread 

Footnotes

1. Straits Times, 1 May 2008, GIC open to buying more quality bank assets: MM Lee 
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2. Bloomberg.com, 28 August 2008, Temasek expresses confidence in Merrill Lynch 
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3. Bloomberg.com, 15 September 2008, Temasek May Reap $1.5 Billion Gain From Merrill Lynch Takeover  
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4. Ibid. 
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5. Ibid. 
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6. Jakarta Post. 29 July 2005, Government may buy back stake in Indosat from Singapore's firm  
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Addenda

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