November was a big month for Southeast Asia’s telecom industry. In addition to the potential merger between Thai telcos True and Dtac, Indonesia’s state-owned tower operator Mitratel debuted on the Indonesia Stock Exchange with a $1.3 billion IPO. Mitratel currently owns and operates a network of about 18,000 cellular towers throughout Indonesia, and approximately 90 percent of the funds raised from the listing will go toward upgrading and expanding that network, including the addition of 6,000 new towers. With this move, 28 percent of Mitratel is now owned by the public and the remaining 72 percent remain in the hands of Telkom Indonesia.
Telkom is a telecommunications conglomerate, 52 percent owned by the government of Indonesia. It has interests all across the telecom spectrum, but the primary money-maker is a controlling stake in Telkomsel, the country’s largest mobile network provider. Indonesia’s domestic mobile market is huge, and Telkomsel holds a commanding chunk of it with 169.5 million subscribers. It’s a very lucrative line of business. According to Telkom’s 2020 Annual Report, its mobile segment alone generated a $2.3 billion profit on $5.9 billion in revenue.
The tower business, on the other hand, is not quite as lucrative. At least on paper. In 2020, Mitratel booked a net profit of IDR 664 billion on 6.2 trillion in revenue. That’s not too bad, but it’s nowhere near the same level as Telkom’s mobile business. Building physical network infrastructure is necessary to be a competitive telco, but it’s also expensive (especially in a sprawling archipelago) and with limited profitability it can weigh down a firm’s financial position. Maybe that’s why the parent company, Telkom, decided it was time to trade some equity for an injection of capital.
Probably not, though. In a company like Mitratel, official income figures can be misleading because of the way certain costs are recognized. The upfront costs of building thousands of cell towers are obviously high: Mitratel has been shelling out hundreds of millions of dollars every year to acquire land and build structures. According to the basic principles of accounting, in the income statement those kinds of capital outlays are amortized over time and the fixed assets they create, such as cell towers, are subject to depreciation. The result is that final net income inevitably comes out looking low simply due to the amortization and depreciation of these large upfront capital expenditures. If we remove debt, interest, amortization, and depreciation Mitratel actually made a cool IDR 4 trillion in 2020.
This is one of the major reasons why it makes sense to spin them off as a separate, publicly listed entity. Savvy investors will know that when they buy Mitratel stock, they may not see huge annual earnings on the income statement, but the company should be able to pay a reliably solid cash dividend, especially over a longish time horizon when they aren’t pumping so much money directly into the acquisition of physical infrastructure. From Mitratel’s point of view, what they really need right now is a big infusion of cash to continue building out the tower network. $1.3 billion in proceeds from an IPO will serve that purpose for the time being, without the need to take on more long-term debt in the form of loans or bonds.
So that’s the business logic of the Mitratel IPO. But these companies – Telkom, Telkomsel, and Mitratel – are also all majority owned by the Indonesian government so there are probably some deeper strategic considerations at play. And one of those is that Indonesia is chomping at the bit to show investors that it is open and ready for business, especially in its booming consumer-facing tech sector. We are expecting to see a wave of big tech-related IPOs in the near future, such as the Gojek-Tokopedia partnership.
One of the things Mitratel’s listing does is send a message that the state is willing to make room for private capital to be safely and profitably invested in Indonesia, through Indonesian intermediaries like the domestic stock exchange. Further to that, it’s also sending the more subtle signal I think that as these tech unicorns start going public, the necessary physical infrastructure to support a booming e-commerce market will be there. That private capital, channeled through the Indonesia Stock Exchange, can be lassoed to help meet those investment needs is something the Indonesian state is anxious to convey, and its willingness to give up some equity in Mitratel helps drive the point home.