Breaking up Semen Gresik<\/p>\n
The government's decision last week to break up Semen Gresik's
\nthree cement units will automatically void its three-year
\nconditional sale and purchase agreement with Mexico's Cemex
\ncompany, scheduled to expire on December 14, and raise serious
\ndoubts about the government's ability to honor its contract.<\/p>\n
The government nevertheless hopes the new deal would meet the
\naspirations of the politicians in South Sulawesi and West Sumatra
\nwho have demanded the total separation of the Tonasa and Padang
\nunits from Semen Gresik, but would still honor part of its
\ncommitment to Cemex by allowing it to increase its shareholding
\nin Semen Gresik to 76.50 percent.<\/p>\n
But the new proposal shows how easily the government has
\nacquiesced to pressures from provincial legislators. Whatever the
\noutcome of future negotiations between the government and Cemex,
\nit will affect the credibility of the whole privatization
\nprogram, especially because most of the prospective state
\ncompanies for divestment to private investors are resource-based
\nventures located outside Java. Now that W. Sumatra and S.
\nSulawesi politicians have 'tasted blood', state companies in
\nother provinces will be vulnerable to similar pressures.<\/p>\n
Under the proposed deal, which has yet to be approved by the
\ninvesting public and Cemex which make up the 41 percent
\nshareholders of Semen Gresik, the government will sell its 51
\npercent stake in Semen Gresik to Cemex but at the same time will
\nacquire a majority stake in Semen Gresik's Tonasa and Padang
\ncement units. If the deal goes through, Cemex will hold 76.5
\npercent of the Semen Gresik unit and the investing public 23.5
\npercent. But the Gresik unit will still own 49 percent of both
\nthe Tonasa and Padang units, with the majority 51 percent held by
\nthe government.<\/p>\n
The proposed deal is substantially different from the put
\noption under the 1998 agreement whereby the government will have
\nthe right to sell to Cemex its 51 percent stake in Semen Gresik
\nand Cemex will be obliged to take that stake at the agreed price
\nof US$1.72\/share or for a total of $520 million or almost three
\ntimes as high as the Semen Gresik price quotation on the Jakarta
\nStock Exchange last Friday. But the Semen Gresik under the put
\noption is supposed to have three cement units with a combined
\ncapacity of 17.25 million tons, while the new proposal offers
\nonly the Gresik unit with 8.2 million metric ton capacity as the
\nTonasa unit with 3.48 million tons and the Padang unit with a
\n5.57 million ton capacity will become government-controlled
\nstand-alone companies.<\/p>\n
It is too technical to analyze here the formula of net present
\nvalue of discounted cash flows used by Laksamana to come up with
\na net income of $200 million after the whole deal is completed.
\nBut the value of the government's 51 percent stake in Semen
\nGresik under the new deal is certainly not as high as $520
\nmillion because the efficiency and market competitiveness of an
\n8.2-million ton plant is certainly much lower than a 17.25-
\nmillion ton group. The new deal will forgo the economies of scale
\nand synergy in marketing, procurement, information technology,
\naccounting, management, which would otherwise be gained by Semen
\nGresik with three units.<\/p>\n
Given Cemex's great interests in the long-term outlook of
\nIndonesia's economy -- in fact it was the only foreign investor
\nwilling to make the plunge, investing in the country in 1998 amid
\nthe height of its political and economic crisis -- it may still
\nbe interested in increasing its stake in Semen Gresik even after
\nthe split up.<\/p>\n
The most crucial factor, though, is what will be the legal
\narrangements to be put in place to ensure that Cemex-controlled
\nSemen Gresik's 49 percent stake in the government-controlled
\nTonasa and Padang units will be managed well. This condition
\nmakes a lot of sense as almost all state-controlled firms in the
\ncountry are notorious for their high vulnerability to corruption,
\ncollusion and nepotism.<\/p>\n
Semen Gresik's consolidated financial report for 2000 showed,
\nfor example, that Semen Padang and Tonasa were the worst
\nperforming of the three cement units in almost all parameters of
\nefficiency (costs of sales, profit margin, production and
\nmarketing performance, material and product prices).<\/p>\n
Predictably, Cemex also will like to know how the government
\nwill go about securing smooth execution of the proposed deal in
\nthe two provinces.<\/p>\n
The whole proposed deal could end up in tatters if the
\ngovernment fails to force the politicians in the two provinces to
\naccept the transaction and if Cemex is not given a significant
\nrole in securing efficient management of the two cement units.<\/p>",
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"sponsor": "Okusi Associates",
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