Chicken or beef? Investors face tough choice with Garuda IPO

* Foreign investors baulk at rich valuations, govt interference
* Stake sale may be cut to $350 mln if demand weak - minister

National carrier PT Garuda Indonesia's hopes for a high-flying $1.1 billion IPO may fail to get off the ground because it has been priced so richly that foreign investors have been scared away. 

Indonesia will set the final price for the long-delayed Garuda offer later on Tuesday, but after riding a surge in interest in Southeast Asia's largest economy and a recovery in the global airline industry, appetite for the deal has sharply fallen. 

Several local and foreign institutional investors briefed by Garuda during a global roadshow over the past two weeks have snorted at pricing that sets shares in the airline at 750 to 1,100 rupiah -- valuing it far higher than more successful regional competitors. 

"We did look at it, but didn't participate and for reasons you already know," said a fund manager who asked not to be identified. "If I reveal those, I will be refused entry into Indonesia on my next trip." 

Investors attracted to Indonesia's booming economy are wary of state interference in a country where some of the biggest enterprises are owned by the government, giving them big advantages over private firms. 

Garuda's IPO has already involved the highest levels of power, with President Susilo Bambang Yudhoyono and his top advisers consulted when airline and privatisation officials went against the advice of the book valuers' suggested range of 560-850 rupiah, sources close to the deal say. 

SIZE MAY BE CUT

The government was accused by some critics of selling off assets cheaply last year when the IPO for Krakatau Steel was heavily oversubscribed after being priced at the bottom of the range. 

Mustafa Abubakar, the state-owned enterprises minister, told Reuters late Monday that cutting the number of shares on offer to raise only $350 million was one option that could be considered in the event of weak demand. 

Garuda is offering a 36.5 percent stake, or 9.362 billion new and existing shares, and if the top end of the range is met it would make it second only to the launch of PT Adaro Energy , which raised $1.3 billion in 2008. 

Garuda's price range reflects 7.4 to 10.8 times its Enterprise Value (EV) to EBITDA, said Iman Rachman, head of investment banking at Mandiri Sekuritas, one of the local underwriters. 

That is higher than regional peers such as Singapore Airlines with an EV to EBITDA at 4.8 times, and Thai Airways at 4.9 times, according to data from Thomson Reuters' Starmine.

Garuda' IPO is the first of a slew of state enterprises due for flotation this year and will also be closely watched by flag carrier Vietnam Airlines, which is planning to go public this year. 

"Don't even ask about international investors," one person familiar with the IPO told Reuters, adding that any interest was focused at the bottom end of the range.

"Garuda will probably get zero international clients at the end of the day. It's that bad." 

Government officials hope that even if institutional investors stay away, shares in Garuda -- named for a mythical giant bird -- will be snapped up by locals keen to own a part of a national treasure. 

Pandu Djajanto, privatization deputy for the state-owned enterprises ministry, said the price reflected a sentimental value of local investors and that Garuda "is our nation's pride".

Even if Indonesians can be persuaded to invest, the offering comes as Jakarta stock exchange has dipped 10 percent this year due to concerns over rising inflation and fears the central bank, which has kept benchmark interest rates at a record low of 6.5 percent for over 18 months, is behind the curve. 

That said, it comes following a year in which Indonesia has been a darling of emerging market investors who have poured billions into equities and bonds, attracted by returns and yields that developed economies can only dream of. 

Garuda, founded in 1949, has flown into difficulty in recent years and only last year was allowed to resume flights to European Union countries after being banned because of concerns over safety standards following a spate of accidents. 

It also experienced significant debt problems, converting loans from Bank Mandiri into a 10.6 percent stake in the carrier, which will be sold off in total if the IPO is fully realised.

Indonesia remains a promising market for airlines, however, with increasing air travel amongst a burgeoning middle class in the world's fourth most populous country across the archipelago's 17,000 islands and beyond. 

Citigroup and UBS are joint bookrunners on the deal. Source: Reuters