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Garuda's IPO Fails to Impress Investors

Poor Response to Garuda Indonesia's IPO May Leave Plans to Settle Debt and Fund New Armada Underfunded.

(2/14/2011) World-wide promotion and an extensive advertising campaign failed in the end to impress investors purchasing shares during the launch of the initial public offering (IPO) of the state-owned national carrier Garuda Indonesia.

According to the Jakarta Globe, Garuda opening price fell 23 percent to Rp. 580 (US$0.06) from its opening offered price of Rp. 750 per share. At the end of the first day of trading Garuda's share price stood at Rp. 620, down 17%.

The lackluster opening must serve as something of an embarrassment for Indonesia's Minister of State Enterprise, Mustafa Abubakar, who had overridden the suggestions from underwriters for a price range of Rp. 560 to Rp. 850, insisting that for "reasons of national pride" the airline's the valuation should fall between Rp. 750 to Rp.1,100.

Unfortunately, the Ministers optimism was detached from the currently bearish market sentiment that had adversely affected other recent IPOs, poor financial results recently released for the airline, and a comparative case analysis which questions the airlines financial performance among a competitive circle of regional airlines.

The Minister was quick to dismiss the poor debut for the IPO, saying, "it's not unusual that Garuda's shares would plunge because the market is bearish." The Minister expressed his conviction that Garuda's performance over the coming six months would raise the share value of the airline.

On a practical level, the tepid response to Garuda's IPO may see the national carrier raise something less than US$540, a figure far short of the optimistic initial projection of Rp. 10.3 trillion (US$1.14 billion) which would have allowed Garuda to retire a large part of its current debt burden and provide needed cash to fund the fleet expansion required to recommence full European and U.S. services.

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