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akarta-listed consumer goods giant PT Indofood Sukses Makmur is seeking loans from banks to support spending on the acquisition of Singapore-listed China Minzhong Food Corporation Limited (CMFC), an attempt analysts said would boost financing costs.

'€œWe will use bank loans. However, we still don'€™t know how much,'€ Indofood director and corporate secretary Werianty Setiawan said on Monday.

Indofood announced last week it offered to purchase shares in CMFC, after the latter saw its stock price tumble by a half following the alleged fabrication of its sales and payments to the largest supplier, doctored accounts and overstated capital spending initially reported by a short seller.

Indofood entered CMFC for the first time in February by purchasing a 14.4 percent stake in the company worth S$85 million (US$66.84 million). A month later, Indofood doubled its stake to 29.3 percent. Early last week, the company said it had purchased more shares in CMFC to increase its ownership to 33.49 percent, leading to a mandatory tender offer in the Chinese company.

Under the offer, Indofood will purchase the remaining stake for S$1.12 apiece. Certain shareholders with a combined ownership of 6.6 percent have declined to sell their stake to Indofood. Therefore, the company will only carry out the offering for a maximum of 392.4 million shares in CMFC with the total deal to reach S$439.49 million.

Following the announcement, Indofood purchased more stakes in CMFC. Its ownership stood at 59.42 percent as of Sept. 6 with total spending of S$416.3 million, Yualdo Yudoprawiro '€” an analyst with PT Samuel Sekuritas Indonesia '€” said in a research note.

Yualdo said Indofood was still working on the completion of the tender offer process of the remaining stake. The total amount of money needed would be around S$248.7 million.

'€œIndofood will be able to finance the acquisition and tender offer by its internal cash,'€ Yualdo said, referring to Indofood'€™s cash position of Rp 13.3 trillion (US$1.2 billion) as of the end of the first half of the year.

CMFC is also expected to give a good contribution to Indofood, PT Nomura Indonesia said in its research. CMFC is a producer of fresh and processed vegetables with customer networks in 26 countries.

'€œAssuming the allegations of fraud against CMFC are not proven and Indofood acquires a 93.4 percent stake in the subsidiary, we estimate a contribution of up to 13 to 15 percent in Indofood'€™s 2014 full year operating income from CMFC,'€ Nomura said.

Nomura added the consolidation of CMFC would lead to an 8 to 10 percent addition in consolidated revenue for Indofood and a 16 to 18 percent increase in operating profit next year.

'€œHowever, we don'€™t expect the income increase to fully filter down to the bottom line of the parent company owing to the potentially higher financing cost from a larger borrowing to finance the acquisition,'€
Nomura said.

Indofood is one of many Indonesian companies that will likely be harmed by the weakening rupiah exchange rate against the dollar as the company is still importing some of its raw materials.

Based on Nomura research, Indofood will also be burdened by the higher interest cost as 41 percent of its debts are in US dollars. Moreover, the higher interest rate after Bank Indonesia lifted the key rate would also push up Indofood'€™s financing costs.

'€œWe expect Indofood'€™s CBP [consumer branded products unit run by subsidiary PT Indofood CBP Sukses Makmur] and flour milling businesses to increase their respective average selling prices by 10 percent in 2014 to partially pass on the cost increase from rupiah depreciation,'€ Nomura said.

Shares in Indofood, traded were closed at Rp 6,350 apiece on Monday, surging by 6.72 percent from the previous day of trading.