DBS, partly owned by Singapore's sovereign investment arm Temasek Holdings, said on Monday it had agreed to take over Danamon in a cash-and-shares transaction that would rank as Asia's fourth-largest banking deal on record.
But Indonesia's biggest-ever foreign takeover could also turn into 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.
If successful, the deal could spark more foreign bank takeovers, with shares in Bank Panin Indonesia jumping 6 percent on Monday on bets that it too could become a target.
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," one of the bankers, a senior executive of a rival local lender, speaking on condition of anonymity 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 the parliament, 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 that a politically focused campaign could prove unpredictable.
DBS is buying most of Danamon, at a hefty 52 percent premium, in the form of new DBS shares from the Indonesian bank's controlling shareholder, Temasek, which in turn will become an even bigger owner of DBS as a result of the deal.
It would make Singapore-based DBS the fifth-biggest lender in Indonesia, one of the region'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 of its peers and a heavy exposure to auto financing, an area vulnerable to recently announced steps by policymakers to curb excessive lending in Southeast Asia's largest economy.
"We have the capacity to unshackle these businesses," Chief Executive 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 coming in 7,000 rupiah ($0.77) per Danamon share, which last traded at 4,600.
"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 2008-2009 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.
Shares in DBS and Danamon were halted from trade on Monday, pending the announcement. Danamon stock has fallen by a quarter over the past 12 months, while the wider Indonesian market has gained ground. DBS has fallen 2 percent over the same period.
DBS signaled on Monday it also aimed to expand in Malaysia, saying it had approval to negotiate to buy a 14 percent interest in Alliance Financial Group - again from Temasek.
The Alliance stake is worth about $270 million. Shares in the Malaysian bank jumped 3 percent on the news.
DBS's 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.
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. would also be watching the Danamon takeover closely. ANZ, which owns 38.5 percent of Bank Panin, is keen to increase its stake but valuation differences derailed talks with the founding Gunawan family, which holds 46 percent.
Gupta said he expected the Danamon deal to close in the second half of the year, subject to regulatory approval.
DBS said it would initially pay S$6.2 billion in shares to buy a 67.37 percent stake in Danamon from Temasek. It would then buy out Danamon's minority investors for cash.
The Danamon deal's implied price-to-book ratio of 2.6 times is below the 4.2 times paid by HSBC for Indonesia's Bank Ekomomi Raharaja in 2008. It is also below the multiple paid by Maybank for Bank Indonesia Internasional.
Credit Suisse and Morgan Stanley are DBS's joint financial advisers, while WongPartnership LLP and Hadiputranto, Hadinoto & Partners are legal advisers.
Temasek is being advised by Bank of America-Merrill Lynch and UBS. Danamon is being advised by Citigroup and Deutsche Bank.
