By Saeed Azhar and Neil Chatterjee
SINGAPORE/JAKARTA (Reuters) - Singapore's DBS Group
DBS, part-owned by Singapore sovereign investment arm Temasek Holdings
Temasek is on both sides of the transaction as it also owns 67.4 percent of Danamon, and has had additional exposure to Indonesia through the DBS franchise there.
If the deal is approved, Temasek will be invested in a single bank in Indonesia, rather than two - something that should please government officials in Jakarta, sources familiar with the deal said.
But Indonesia's biggest foreign takeover could become a test of its openness to overseas capital, a month after Jakarta moved to curb foreign ownership of mines and less than a year since it voiced concerns over foreign bank holdings.
It could also trigger more foreign bank takeovers, with shares in Bank Panin Indonesia
However, some Indonesian bankers said they would try to block the deal and were considering a media campaign targeting public opinion in the hope of influencing politicians. Local rivals face stiffer competition from expanding foreign banks.
"You're going to see some movements to halt this deal in the coming days," said a senior executive of a rival local bank, who asked not to be named because of what he called the sensitivity of the issue.
"This is about nationalism. We don't have to be afraid of Singapore ... We're going to raise this case to parliament, the central bank and (banking regulator) Bapepam," he added.
Bankers and industry analysts agreed there was little scope for a rejection of the deal on strict regulatory grounds, but a politically focused campaign could prove unpredictable.
GRAPHIC on deal http://r.reuters.com/tep47s
DBS is buying most of Danamon, at a hefty 52 percent premium, in the form of new DBS shares from Temasek, which in turn will become an even bigger owner of DBS.
It would make Singapore-based DBS the fifth-biggest lender in Indonesia, one of southeast Asia's hottest markets, where bank penetration is low and annual loan growth runs at 20 percent.
However, Danamon has lower returns on equity than some peers and a heavy exposure to auto financing, an area vulnerable to recently announced steps by policymakers to curb excessive lending in the region's largest economy.
"We have the capacity to unshackle these businesses," DBS's CEO Piyush Gupta said in Jakarta on Monday, briefing investors on his first major deal since becoming boss in 2009.
"This changes our growth profile," Gupta said, adding the move would triple DBS's exposure to high-growth markets from 11 percent now. The price was fair, he said, and the Indonesian growth story was reflected in Danamon not being a "cheap deal".
Gupta said DBS would cut Danamon's funding costs, expand its business into regional trade and corporate finance - and break the perception of DBS as a low-margin, mature-market bank.
The price - S$6.2 billion ($4.93 billion) in shares for Temasek and the rest in cash for minority investors - initially surprised some investors, with the offering at 7,000 rupiah ($0.77) per Danamon share, which last traded at 4,600 rupiah.
"Danamon minorities are in for a windfall," said Anand Pathmakanthan, an analyst at Nomura Securities in Singapore, predicting DBS shares would suffer as a result.
But the price looked less generous using another valuation yardstick: at 2.6 times book value, it was below some other big banking takeovers in Indonesia - although previous benchmarks were set before the 2008-09 global financial crisis.
Temasek already owns about 29 percent of DBS and its stake would rise to about 40 percent after the deal. Temasek has obtained a regulatory waiver from having to make a general offer for the remaining DBS shares.
Trade in DBS and Danamon shares was halted on Monday, pending the announcement. Danamon stock has fallen by a quarter over the past 12 months, while the wider Indonesian market <.JKSE> has gained ground. DBS has fallen 2 percent over the same period.
LOOKING TO EXPAND IN MALAYSIA
DBS signaled on Monday it also aimed to expand in neighboring Malaysia, saying it had approval to negotiate to buy a 14 percent interest in Alliance Financial Group
The Alliance stake is worth about $270 million. Shares in the Malaysian bank jumped 3 percent on the news.
Gupta said Danamon suffered from high funding costs due to its weaker deposit base and use of wholesale markets, where interest rates had jumped since the global crisis.
According to its website, Danamon and its subsidiaries operate some 2,900 branches and points of sale, and employ close to 62,000 staff and non-permanent workers. Net income last year rose 16 percent to 3.3 trillion rupiah ($367 million).
Gupta, 52, aims to expand DBS beyond Singapore and Hong Kong, which make the bulk of its profits, but one DBS shareholder, Aberdeen Asset Management, questioned whether Jakarta would have any concerns over the Danamon deal.
"It will be interesting to see the reaction of Indonesian authorities," said Hugh Young, Aberdeen's Asia chief.
Indonesia's central bank last year considered a law to limit bank ownership, putting some deals on ice, but the state deposit agency recently said policymakers would not go ahead with it.
Some bankers said Australia and New Zealand Banking Group Ltd
Gupta said he expected the Danamon deal to close in the second half of the year, subject to regulatory approval.
The deal's implied price-to-book ratio of 2.6 times is below the 4.2 times paid by HSBC
Temasek is advised by Bank of America-Merrill Lynch
($1 = 1.2574 Singapore dollars)
($1 = 9144 rupiah)
(Additional reporting by Andjarsari Paramaditha and Janeman Latul in JAKARTA, Kevin Lim in SINGAPORE and Denny Thomas in HONG KONG; Editing by John O'Callaghan, Mark Bendeich and Ian Geoghegan)