UK-based private equity firm CVC Capital Partners is to acquire a 91% stake in Indonesia's Matahari Department Stores (MDS), a subsidiary of retail group Matahari Putra Prima, in a deal worth IDR7.2trn (US$768mn). Indonesia's largest ever private equity deal, the relatively high value of the purchase of the 88-outlet-strong network has been attributed to the country's sustained economic growth, rapid middle class emergence, improved political stability and strong recent retail sales growth.
MDS is the flagship of its parent's diverse retail business. Targeting Indonesia's growing middle classes, the result of sustained, healthy private consumption-led economic growth, the division achieved same-store sales growth of 19.1% year-on-year (y-o-y) in 2008. When 2009 results are released, we would expect to see a slight slowdown in sales growth, Indonesia not having been completely immune to the effects of the global economic downturn, even if it has proved relatively resilient compared to some of its more export-dependent neighbours.
Nonetheless, BMI would not expect this slowdown to be significant. Notwithstanding a y-o-y contraction in February 2009, Indonesia's real retail sales index continued to grow throughout the year, accelerating into double-digit territory in September, October and November (see chart). The late year acceleration will in part be due to the base effects of the beginning of the global financial meltdown in late 2008, and yet the signals - coupled with positive long-term macroeconomic forecasts - have proved motivation enough for CVC to take the plunge.
What Of Matahari?
Once the deal is finalised, attention will likely shift to Matahari and its plans for future retail development without MDS at its core. It is important to note that Matahari will not be shedding its department store interests completely. CVC intends to make the acquisition through a new joint venture company called Meadow Asia in which Matahari could hold up to a 20% stake. The objective of Meadow Asia, and thus in turn Matahari, will be department store expansion throughout South East Asia to take advantage of similar middle class emergence and urbanisation trends occurring elsewhere in the region.
However, with the parent company likely to profit comfortably from the buyout, BMI would also expect increased investment in other retail areas. Matahari's Hypermart unit has been a key growth driver for the group for some time, while the company's smaller-format Foodmart unit has also benefited from strong consumer interest in modern grocery retail in Indonesia. Investment in new store openings, in order to gain ground on runaway market leader Carrefour, is therefore likely to be a priority for the company, particularly in light of forecast mass grocery retail sales growth of 64% in the country through to 2014.
Politically, Indonesia remains far from the finished article; corruption, ethnic diversity and Islamic militancy remaining major deterrents to investment. However, following two peaceful parliamentary and presidential elections, in 2004 and 2009, there is a feeling that democracy is finally taking root in the country after a highly uncertain period following the fall of President Suharto in May 1998. This relative optimism has perhaps helped tip the risk/reward balance in favour of the opportunity represented by Indonesia's promising economic outlook and CVC's investment could trigger further private equity involvement, particularly in the high growth consumer sector.
More broadly, CVC's bid for MDS is illustrative of an expected uptick in regional private equity activity. According to data from Asia Private Equity Research, as quoted in the Financial Times, the sum of Asian deals involving buyout firms was just US$19.1bn in 2009, down from US$44.4bn in 2008. This fall in investment has left regional players with large un-invested funds just as the strong forecast return of demand in the region is once again opening up Asia Pacific investment opportunities.