Cover Story / November 2018

Rescuing Indosat

By Muhamad Al Azhari Chris Kanter is not a new face at Indosat Ooredoo, Indonesia's second-largest mobile phone operator. The 51-year-old native of Manado, North Sulawesi, was chosen to replace Joy Wahyudi, who stepped down as president director at the end of September. Chris has been a commissioner at the publicly listed company since 2010. Many people know him as an entrepreneur, or business owner, and his decision to accept the challenge raised questions whether a major turnaround was on the cards at Indosat, which has been performing sluggish compared with its closest rivals, XL Axiata and Telkomsel. "Although he is a senior figure in terms of background and experience, Chris wants to come down from the mountain to be a professional. The logic is ... that something big is in the making," Communications Minister Rudiantara told state-run news agency Antara last month, when commenting on Chris's appointment. Chris is an adviser to both the Indonesian Chamber of Commerce and Industry (Kadin) and Indonesian Employers Association (Apindo), while his family controls Sigma Sembada, a conglomerate with diversified interests, including turnkey contractors, transportation and logistics. He has held senior positions at various institutions, including as founder of Global Entrepreneurship Program Indonesia, established with assistance from other high-profile businessmen, including property tycoon Ciputra, media mogul and senior journalist Jacob Oetama, former top executive at diversified conglomerate Astra Group, Theodore Permadi Rachmat, and Rachmat Gobel, the patriarch of family-controlled Gobel International. Among the startups GEPI has groomed so far is ride-hailing company Go-Jek, which was valued at roughly $4 billion as of February this year. Meet the Matchmaker Speaking to journalists during his welcoming and a farewell ceremony for his predecessor, Chris admitted to having played a key role as matchmaker in the 2008 acquisition by Qatar Telecommunications of a $1.8 billion stake in Indosat from Singapore Technologies Telemedia, a portfolio company of Temasek Holdings. "Sheikh Abdullah was interested in a stake in Indosat and he wanted to buy. At that time, I helped with the process," he said, referring to Sheikh Mohammed bin Abdullah bin Mohammed Al Thani, chairman of Qatar Telecommunications, which has since become Ooredoo. At that time, Temasek was dealing with a lawsuit brought against it by Indonesia's antitrust agency, the Business Competition Supervisory Commission (KPPU), which ruled that the wealth fund and some affiliates were in breach of anti-monopoly legislation by owning majority stakes in Indosat and its rival, Telkomsel, the country's biggest mobile phone operator. The acquisition went smoothly, allowing Qatar Telecommunications to get control of a 40.8 percent stake in Indosat. But it was apparently not enough, as the Qatari investor sought a controlling stake. Chris was among several high-profile businessman involved in the matchmaking process, and advised the Qatari investor on how to clear some regulatory hurdles, including confusion over whether a foreign investor could own more than 49 percent of an Indonesian telecommunications company. Indonesia's negative investment list sets a maximum foreign ownership limit of 49 percent in a fixed-line telecommunications operator, but allows for foreign control of up to 65 percent of a mobile phone operator. "At Kadin, I was active in the international relationship division," Chris said, adding that he also contributed to the input provided to the government on revisions of the negative investment list. He recalled that about a year and a half after the acquisition, he was appointed as a commissioner representing the government's stake in Indosat. Doha-based telecommunications giant Ooredoo then managed to increase its stake in Indosat, and currently controls 65 percent. The Indonesian government has a 20.7 percent stake, while the remainder belongs to the public. In 2015, the company rebranded itself, becoming Indosat Ooredoo, to align with its parent. Decision Making Five years after the acquisition, Ooredoo chairman Sheikh Abdullah asked Chris to change sides and become an independent commissioner representing the Qatari investor's interests in the company. "Since then, I engaged with the board of directors and commissioners more often... I took part in some of the company's important decisions, including the appointment of Joy [as president director]," he said. Joy, who previously served as director and chief of sales and distribution at Indosat, was appointed in November 2017, replacing Alexander Rusli. Investors had a lot of confidence in Joy at the time, as he had about 20 years of telecommunications experience. Joy's efforts saw the company booking net income of Rp 1.1 trillion ($72 million) last year, which was 2.8 percent up from the previous year. This was partly the result of his initiatives to make the company's operations more efficient, transform the organization and its business model, launch an aggressive marketing campaign and reduce its foreign debt burden. Indosat, trading under the ISAT ticker symbol on the Indonesia Stock Exchange, reported a 2.5 percent increase in consolidated revenue last year to Rp 29.9 trillion, thanks to higher revenue from smartphone and data subscriptions, and a significant increase in revenue from business-to-business customers. Indosat saw its subscriber numbers increase 28.6 percent to 110.2 million in 2017 from the year before, with about 73 million of those being smartphone subscribers. Its US-dollar denominated debt also declined 49.9 percent to $90.3 million (representing 6.3 percent of total debt) from $180.1 million (or 12.1 percent of total debt). Lower foreign-denominated debt means a reduced burden on the company to pay interest costs, amid a weakening rupiah. Large Capex Boost Needed However, it was not all good news for Indosat this year. The company swung to a Rp 693.7 billion loss in the first six months after posting a Rp 784.2 billion profit in the same period last year. This made the company the worst performer among its two closest rivals, XL Axiata and Telkomsel. While Indosat blamed a new government regulation that requires the registration of SIM cards, analysts attributed the company's loss of a significant number of subscribers to insufficient spending on network expansion in an already saturated industry. State-controlled brokerage Bahana Sekuritas wrote in an equity note on Aug. 9 that Indosat had suffered the sharpest decline in revenue yield on data services among the country's three major operators. Bahana's telco research team said Indosat's network was "congested" compared with Telkomsel and XL Axiata. In a country where the telecommunications market is fast becoming saturated and crowded, operators must find ways to improve revenue from an increasing number of smartphone users. Network operators compete for subscribers by offering the best data package deals, while also providing quality networks to allow users to enjoy a smooth experience while surfing the web. The government introduced mandatory registration of SIM card earlier this year due to security concerns. Senior officials, including Minister Rudiantara, said this policy would help prevent crimes being committed by people using untraceable SIM cards. But it was a double-edged sword, not only discouraging people from using multiple SIM cards, but also preventing operators, such as Indosat, from aggressively marketing new SIM cards. "Indosat's strategy of pushing new SIM starter packs has lost its luster with the registration of prepaid SIM cards becoming mandatory," DBS Group Research said in a July 2018 equity research note. "[Indosat] was reliant on selling cheap starter packs through dealers in the past and now faces more challenges than other players in the market, in our view. [Indosat] is expected to lose considerable market share to XL Axiata, which is better diversified geographically and offers superior network quality," the group said in the report. Indosat said its subscriber numbers declined to 96 million at the end of June from 110.2 million in December. Although it retains its place as the country's second-largest operator in terms of subscribers, many analysts expect it to drop to third place if it fails to adequately address the issue of network quality. There was a time when Indosat was beaten by its closest rival, XL Axiata, which is 66.4 percent owned by Malaysia's Axiata Group. Indosat had 59.6 million users, compared with XL Axiata's 60.5 million in March 2014. The registration policy also affected XL Axiata, which is currently Indonesia's third-largest mobile phone operator. It booked a net loss of Rp 81.74 billion in in the first six months, compared with a Rp 143.11 billion profit in the corresponding period last year. Telkomsel was also affected, but managed to maintain its profitability. The subsidiary of state-owned telecommunications company Telkom Indonesia reported a 26.06 percent decline in net income to Rp 12.94 trillion in the first six months. Chris said the first thing he asked Ooredoo was to increase Indosat's capital expenditure, adding that he requested about Rp 30 trillion for next year, which is considered a somewhat fantastic figure, compared with the Rp 8 trillion set aside for this year. "Shareholders flew here specifically to ask me to take over the leadership at Indosat," Chris told journalists during the gathering. Chris is not just an ordinary figure in the Indonesian business community. The businessman-turned-executive, who was born on April 25, 1952, served in the People's Consultative Assembly (MPR) between 1998 and 2002, and he was also a member of the Investment Coordinating Board (BKPM) between 2010 and 2014. He conveyed the message from the Qatari investor, who said it was not that it did not wish to massively increase capex. "Indosat actually has far bigger advantage with Ooredoo backing it as a majority shareholder. Qatar has a lot of money; their problems are about how to spend their money," he said. Chris said according to the majority shareholder's review, the "deliverable" outcomes of the company's capex are limited so far. He did not explain further, but analysts previously said Indosat had been neglecting its network, which has affected the quality. Indosat is considered the most sluggish in its spending to improve its network, especially regarding the rollout of commercial 4G services, which the company started in 2014. According to a report by, which serves as a guide to the state of mobile networks across the world, Indosat's 4G network is even weaker than its much smaller rival, Smartfren, controlled by the Sinar Mas Group. Furthermore, Indosat's Rp 8 trillion capex for this year is low, considering its subscriber numbers. In comparison, Telkomsel, with 196.3 million subscribers as of last year, set aside Rp 30 trillion in capex for the year, while XL Axiata, with 54.5 million subscribers, budgeted Rp 7 trillion. Capex Funding Options While Chris is upbeat that the Qatari investor would approve his plan to massively increase Indosat's capex, Victoria Venny, an equity analyst at MNC Sekuritas, warned the company to be careful in choosing the funding source. She said a mobile phone operator should ideally set aside between 20 percent and 25 percent of its annual revenue for capex. "If they can book Rp 30 trillion in annual revenue, then the ideal capex is about Rp 6 trillion to Rp 7.5 trillion. If they plan to go for Rp 30 trillion in capex, it would likely be difficult to achieve," she said, adding that Indosat may have limited options to secure such massive funding. Indosat booked Rp 11.06 trillion in sales between January and June this year – 26.7 percent lower than in the corresponding period last year. Room to secure additional funding is also limited, with its net debt-to-equity ratio (used to measure a company's financial leverage) already at between 1.4 and 1.5 – far higher than rivals XL Axiata and Telkom, which have net DERs of between 0.5 and 0.6. Meanwhile, Indosat's total DER is already at 2.6, with most analysts considering 3 as the maximum level for a telecommunications company. With total debt at slightly more than Rp 36 trillion and equity at Rp 13 trillion as of June this year, the maximum amount of debt the company can take on is Rp 39 trillion if it does not want to exceed a DER of 3. "If Indosat is looking for capex funding through more debt, that will be very difficult. At the maximum, it can only secure Rp 3 trillion," Venny said, adding that the company's current cash flow also does not support such a plan. "Furthermore, selling bonds nowadays is very difficult," she said, referring to weak investor appetite for assets in high-risk, high-yield emerging markets. Venny suggested that Indosat restructure its financial situation, with one of the most realistic options being a rights issuance to boost equity. But this is not an easy option, as it requires government approval. "The government, as one of the major shareholders in Indosat, may not want to spend more money on Indosat, or may not want to have its portion diluted," she said. Venny added that shareholders may also look for a consolidation, including the acquisition of another player. Is Chris Kanter Indosat's Last Hope? Chris explained that the capex increase was just one part of the bigger picture of Indosat's massive transformation, which involves three aspects: the people, the business and its networks. "I told Sheik Abdullah that I am not looking for money here. I am looking for a legacy," Chris said when explaining the terms and conditions he put to shareholders before accepting the position as president director. This included a significant increase in capital spending. Chris, who was chairman of the German-Indonesian Chamber of Commerce and Industry between 2007 and 2009, said he proposed to the Qatari investor to hire US-based consulting firm Boston Consulting Group, which would cost the company "tens of millions" of dollars to make "a very massive change." "It was approved," he said. A top telecommunications industry executive said Chris may be Ooredoo's "last hope" to improve performance of the company in which they have invested tens of billions of dollars. Indosat contributed to an overall 6 percent year-on-year decline in first-half revenue at Ooredoo this year, along with the Qatari company's investment in Algeria. When asked what he would prioritize to improve Indosat's performance, Chris said his approach would differ considerably from those of his predecessors. He said that prior to meeting journalists at the gathering, he told the Indosat team in a general meeting that he planned to prioritize human resources management in the company. "That's the reason I will have my first meeting with HR, instead of the finance or network divisions, unlike many other president directors," he said. Chris said that during his term as commissioner, he was not entirely sure of the company's manpower requirements. "Whether the existing team is too big or too small, I will observe," he said. Replying to a question whether Indosat's staff complement may be bloated, Chris replied with an analogy. "If a person is too fat, the solution is either that they must run faster to slim down, or undergo liposuction to get rid of the excess fat. If you ask me, I want Indosat to run faster," he said. Since taking the helm at Indosat, Chris has started to appoint new people in key positions, including a chief marketing officer. In the public announcement of his appointment as president director, some new names appear in the board of directors, including Eyas Naif Assaf and Arif Musta'in, who replaced Caba Pinter and Herfini Haryono. Eyas has been the chief financial officer of Ooredoo in Algeria since 2016, while Arief is a 20-year telecommunications industry veteran who served as executive general manager of Telkom's digital service division between 2015 and 2018. Chris handpicked the latter after reviewing his track record on corporate innovation, digital transformation and broadband business. Chris said Indosat "has been the place of innovation," since its establishment as Indonesia's first foreign investment company in November 1967. "It should be the place where you see the latest developments in technology and it should serve as a talent pool for the industry," he said. Indosat started off by offering international telecommunications services via satellite. It was then acquired by the government before becoming the first state-owned company to go public on an international stock exchange. Indosat listed on both the then-Jakarta Stock Exchange and the New York Stock Exchange in 1994. The company has survived many difficulties in Indonesia's telecommunications industry, especially when the country started to liberalize the sector. Indosat acquired satellite operator Satelindo from Telkom in 2001. It later established Indosat Multimedia Mobile, or IM3, providing a nationwide GPRS network, which was a first for the country. In 2003, Indosat merged with its three telecommunications arms – Satelindo, IM3 and Bimagraha – before becoming a mobile phone operator. The sale of a significant stake in Indosat during the administration of then-president, Megawati Sukarnoputri, created major controversy at the time and something many people regret to this day, as the company was considered a strategic national asset. "I know my homework is not easy, due to the legacies of the past, but I am upbeat over Indosat's future. My colleagues at Indosat must be confident that Indosat will continue to exist and continue to grow in the future," Chris said. "I couldn't possibly sit here and talk to you all if I accepted the challenges without seeing something big and deliverable," the entrepreneur-turned-executive added.