TLK to Strengthen CDMA Footprint - Analyst Blog

The Indonesian CDMA market is witnessing massive consolidation. Recently, P.T. Telekomunikasi Indonesia Tbk. (TLK), the largest integrated telecom service provider of Indonesia, decided to acquire smaller telecom service providers in Indonesia like P.T. Bakrie Telecom to expand its CDMA network. The deal size is likely to reach $1 billion and is expected to close by end 2010 subject to regulatory approval.

Telekomunikasi will merge its existing CDMA wing TelekomFlexi with Bakrie Telecom. Several analysts opined that the proposed merger will create a near monopoly in the Indonesian CDMA market. TelekomFlexi has 15 million subscribers and Bakrie Telecom has 11 million subscribers. Together these two entities constitute nearly 90% of the total CDMA subscriber base in Indonesia.

Indonesia is an emerging economy in the Asia-Pacific region with a mobile penetration rate below 60%. Favorable industry trends are expected to sustain robust growth in the wireless business of Telekomunikasi for the next several years. Mobile services are becoming increasingly popular as a result of declining handset prices, attractive service plans and better network coverage.

At the same time, deregulation of the telecom segment by the Indonesian Government has enabled several competitors to provide similar services at lower costs to subscribers. Indonesian wireless service providers slashed prices in order to capture market share. As a result, ARPU (average revenue per user) reduced across the industry. Major competitors of Telekomunikasi are P.T. Indosat Tbk. (IIT), and P.T. Excelcomindo Pratama.

Acquisition of Bakrie Telecom will enable Telekomunikasi to consolidate its market position that currently commands a 45% market share for both mobile and fixed-line telecom services in Indonesia. The company has expressed continued interest in acquiring ownership stakes in telecommunications operators of neighboring countries possibly Bangladesh, India and/or Sri Lanka.

We maintain our long-term Neutral recommendation for Telekomunikasi. Currently it is a short-term Zacks #3 Rank (Hold) stock.