Learning lessons from IBRA's asset sales<\/p>\n
Hidayat Jati, Business Researcher, Jakarta<\/p>\n
The financial markets are in a nervous vigil. Is it because of
\nthe \"sweeping\" threat made by Indonesia's loud but small radical
\ngroups against United States citizens and assets? No. They are
\nnervous because by the end of the week they will see whether the
\nMegawati Administration, Indonesia's third government since the
\nbreakout of the crisis in 1997, has the guts to finalize a major
\n-- and only -- national asset sale deal that will make or break
\nits recovery effort.<\/p>\n
Yes, we are talking about the US$500 million sale of the
\ngovernment's controlling stake at PT Semen Gresik Tbk to Cemex SA
\nof Mexico, which has been blocked for three years by vested
\ninterests groups linked to the subject of the transaction.<\/p>\n
Let's not recycle horror stories about financial and economic
\ndisasters should the deal fail to materialize, though horrific it
\nwill be if such a scenario does take place. Let's talk about the
\ngood things. Let's talk about when the government, and its
\nbanking restructuring agency (IBRA), actually managed to sell
\nsome assets to bonafide investors.<\/p>\n
Let's focus on these two deals focusing on these companies: PT
\nIndocement, a cement company, and the PT Sinar Plataco, a
\nmosquito coil company. These rare victories provide good lessons
\nduring this Semen Gresik vigil.<\/p>\n
[By the way, Salim Group, the omnipotent corporate player in
\nIndonesia from the early 1970's until 1998, controlled both
\ncompanies before IBRA took them over. The new owners of these
\nassets happen to be well-established European companies.]<\/p>\n
Both deals clearly show that new capital and new managers
\nbring benefits beyond fresh cash. One major additional benefit is
\nthat, under new ownership and management, the companies will be
\nrun to generate shareholders' value, in contrast to the old
\npractices of subjecting the companies to various dodgey inter-
\ncompany transactions.<\/p>\n
Put it simply, since the new owners had already paid so much
\ncash and\/or other form of capital to acquire the assets, they
\nwould want to run them in the way that would generate maximum
\nreturns. Efficiency and good practice will prevail, all of which
\nshould lead to greater profitability and tax receipts for
\nIndonesia. This is especially true in Indocement's case.<\/p>\n
Other benefits of asset sales may also impact consumers and
\nsociety as whole. This is strongly evidenced in the Sinar Plataco
\ncase, in which the benefits were far greater than the Rp 610
\nbillion cash payment, anyway representing a premium price by any
\nmeasures, resulted by the transaction.<\/p>\n
Under new management (which took control last April),
\nPlataco, which controls about 50 percent of the local market of
\nmosquito coil, will no longer use a hazardous chemical compound
\nas raw materials. The new owner, Reckit Bensckier, recently
\nrevealed by implication that the Salim Group had been using a
\ntype of pesticide, apparently illegal in most countries, in the
\nproduct practically throughout the New Orer years.
\nThose nasty chemicals, if inhaled, could endanger fetuses during
\npregnancy. The Salims, indeed, were economic animals in a very
\nreal sense.<\/p>\n
Let's turn back to the Indocement case. Before the sale, the
\nSalims owned a 45.2 percent stake at the company. The Indonesian
\ngovernment held 45.5 percent, mostly originated from a cash
\ninjection from its coffers into the company in the 1980's under
\nthe direct order of President Soeharto to help the company (In
\nthose days the dogma was that what was good for Salim, among a
\nvery few others, was great for the Republic).<\/p>\n
The investing public held a mere 9.3 percent stake. Such a
\nholding structure by its very nature limits public scrutiny and,
\ninversely, opens the road for reckless management as well as
\ntransfer pricing with other Salim Group entities.<\/p>\n
Indocement was heavily leveraged when the government took
\ncharge in late 1998. By the end of 1999 Indocement was carrying
\nmore than a staggering US$1.1 billion in loans, including a
\nUS$200 million bonds liability (the \"Polymax bonds\" -- for which
\nthe proceeds, according to sources, did not exactly reach into
\nIndocement's coffers) and reported a Rp 66 billion operational
\nlosses.<\/p>\n
Without a debt restructuring, involving some sort of new
\ncapital and ownership, Indocement would be bankrupt, in practice
\nif not legally (these things are not necessarily the same in
\nIndonesia, thanks to our judges and defense attorneys).<\/p>\n
The \"white knight\" finally came in the form of a new owner:
\nHeidelberger Zement AG. The road taken was a complicated scheme
\ninvolving rights issue, put options and debt to equity swaps. Of
\ncourse, it was not a smooth journey.<\/p>\n
There were battles of proposals and counter-proposals,
\nincluding one -- eventually rejected by the government -- that
\nwould result in additional government capital injection.
\nThankfully, the net result was a foreign investment totaling
\nUS$300 million and an initial debt reduction by an estimated
\nUS$200 million (more debt would be reduced from the proceeds of
\ndivesting Indocement's non-core assets, such as coal mine and
\ninvestments in office buildings). Indocement, which employs
\napproximately 7,000 workers, was saved. The government, through
\nIBRA, even managed to make some money.<\/p>\n
What happened to the Salims' holdings and their power over
\nthis asset? Humbled to say the least. The Salims now control a
\n13.4 percent stake in Indocement, formerly one of their crown
\njewels. Most of their executives, including the Soeharto-token
\nSudwikatmono, the former president director, had been kicked
\nupstairs into the board of commissioners.<\/p>\n
The ailing patriarch Liem Sioe Liong resigned. Anthony Salim,
\nthe family heir and Indocement's deputy -- and de facto --
\npresident director, no longer occupies a seat in the company's
\nexecutive boards. So far, among the firm's 7,000 workers, these
\ntwo Salims were the only people that were apparently made
\n\"redundant\" by the acquisition.<\/p>\n
Indocement, moreover, would now use distributors that it 100
\npercent owns, as opposed to privately-held Salim entities.
\nHeidelberger now owns a 61.7 percent stake (there had been
\nreports that they would want to increase their holdings) and has
\nplaced its delegates in key positions including the posts of
\nChief Executive Officer and Chairman of the Board.<\/p>\n
The story of Indocement has been a good one, though it is not
\nover yet. The Indonesian government still owns an estimated 10
\npercent stake in the company, which should be sold in the near
\nfuture, and there had been reports in the local media (Jawa Pos,
\nApril 3 2001), that some Salim delegates in the company had
\nresisted Heidelberger's intention to use the European company's
\noverseas trading network to facilitate Indocement's exports.<\/p>\n
The Salim delegate said he was concerned about the possibility
\nfor the emergence of a \"foreign cartel\". Funny talk coming from a
\nconglomerate that thrived on government-sanctioned monopolies,
\nexclusive contracts and cartels.<\/p>\n
Now back to present day. The government and the House of
\nRepresentatives, who had authorized the privatization program but
\ncontinued to block it, should learn that new capital and
\nmanagement brings benefit much greater than cash. They can also
\nrid us of inefficient and unscrupulous players.<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/learning-lessons-from-ibras-asset-sales-1447893297",
"image": ""
},
"sponsor": "Okusi Associates",
"sponsor_url": "https:\/\/okusiassociates.com"
}