DBS will pay for the acquisition by issuing 439 million new shares at S$14.07 apiece to Fullerton, a wholly-owned unit of the state investment company, Temasek.
Temasek already holds a 29.7 per cent stake in DBS and the new shares will reportedly increase its interest to 40.4 per cent.
DBS, the biggest bank in southeast Asia by assets, said it also plans to launch a S$2.9 billion mandatory cash offer for the remaining Danamon shares it does not own.
This offer will be made at IDR7,000 per Danamon share which DBS said is a 56.3 per cent premium over its one-month weighted average price per share of IDR4,480.
DBS will finance this part of the transaction with internal cash and future debt issuance.
The acquisition increases DBS's exposure to emerging markets in the Asia region, in particular to accelerating economic growth in Indonesia.
"Over the past two years, DBS has strengthened its franchise across Asia and we are now well-positioned to embark on the next phase of growth," chief executive Piyush Gupta said in a statement.
"Indonesia is an exciting Asian market and we believe that we will be able to contribute towards the growth of the Indonesian banking sector, especially in areas such as infrastructure financing, project financing, trade finance and syariah banking.
"With Danamon, we will be able to significantly diversify our revenue mix and further consolidate our position as the Asian Bank of Choice," Mr Gupta added.
Danamon will be merged with PT Bank DBS Indonesia, creating the fifth-largest bank in Indonesia.
Trading in DBS shares is currently suspended on the Singapore Exchange.
Separately, DBS said it has received approval from Malaysia's central bank to commence talks to acquire a 14 per cent stake in Alliance Financial Group in Malaysia.
- CNA/wm
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