Salim Group makes efforts to escape from onslaught<\/p>\n
By Riyadi and Dandy Koswaraputra<\/p>\n
JAKARTA (JP): The giant Salim Group is realigning businesses
\nto ensure its survival following the downfall of its chief patron
\nformer president Soeharto.<\/p>\n
The first significant move is the sale of the Salim Group's
\ncontrolling 60 percent stake in food giant PT Indofood Sukses
\nMakmur to its Hong Kong-based affiliate First Pacific Co Ltd and
\nto Nissin Food Products Co Ltd of Japan.<\/p>\n
Next, Indofood will sell its PT Bogasari Flour Mills, which
\nonce enjoyed a monopoly in flour milling.<\/p>\n
The move allows the Salim Group, Indonesia's largest business
\nempire until Soeharto's downfall, to shift assets offshore and
\nmay shield it against the decline of its patron.<\/p>\n
An analyst at a local securities house said the Salim Group
\nwas racing against time. Salim faces a big political risk because
\nit is heavily connected to Soeharto, who is about to be put on
\ntrial. The impact of Soeharto's trial could snowball to affect
\nhis cronies, including Salim.<\/p>\n
Yuri Sato, a Japanese expert on the Salim Group who is
\nresiding here, said the sale of Indofood to its foreign affiliate
\nwas a clever move by Salim to protect the jewel in its crown from
\na possible political onslaught.<\/p>\n
\"In my observation, Salim is restructuring its businesses. And
\nI think Salim will select prospective businesses like resource-
\nbased industries as its future core and sell out nonprospective
\nones like import-substitution industries,\" Sato told The Jakarta
\nPost.<\/p>\n
\"Indofood has the best prospect among its vast businesses. And
\nit is safer for Salim to make Indofood a foreign company.\"<\/p>\n
The Salim Group, Indonesia's largest business empire until the
\ndownfall of Soeharto, was founded by Liem Sioe Liong, one of
\nSoeharto's oldest business partners. Liem took the Indonesian
\nname of Soedono Salim.<\/p>\n
Benny S. Santoso, executive director of the Salim Group,
\nconfirmed that the sale of Indofood was part of its restructuring
\nprocess. But he did not say if the sale had anything to do with
\npolitical developments in the country.<\/p>\n
He only said that the sale of Indofood, which would be
\nfollowed by other companies, was aimed at reducing the group's
\nleverage both in local and foreign banks.<\/p>\n
\"Currently, the group is concentrating on internal
\nrestructuring to settle all financial problems currently faced by
\nthe group by selling assets and inviting strategic investors to
\nbuy shares in the group's companies, like Indofood (already
\nannounced), Indocement and others,\" Benny stated in a written
\nresponse to the Post's questions.<\/p>\n
\"The proceeds from those sales will be used to reduce debts
\nboth domestically and externally, with hopes that in one or two
\nyears time our economy will improve and the group will have a
\nbetter financial position.\"<\/p>\n
Debt<\/p>\n
Some analysts have expected that Salim would use the proceeds
\nfrom the sale of Indofood to repay its debt to the government.
\nSome others, however, question this.<\/p>\n
Salim will get US$570 million from First Pacific and Nissin
\nfor a 60 percent stake in Indofood, slightly less than Rp 4,000
\n(53 U.S. cents) per share -- lower than its closing price of Rp
\n4,050 on Thursday.<\/p>\n
Indofood Chief Executive Officer Eva Riyanti Hutapea said
\nSalim was actually losing out on the transaction. She contended
\nthat majority shareholders normally sold controlling stakes with
\npremiums.<\/p>\n
\"If I were standing in the position of Pak Anthony (Salim, son
\nof Soedono Salim and chief operating officer of the Salim Group),
\nI would not release it at that price,\" Eva said at a breaking of
\nthe fast meal.<\/p>\n
Nevertheless, she revealed, the deal was actually reached when
\nthe rupiah was still over Rp 13,000 to the dollar and Indofood
\nstock prices were below Rp 2,000 per share.<\/p>\n
Sato noted that if Salim relinquished its ownership in
\nIndofood at a discount, it proved that \"the deal was to save its
\nbusinesses from possible political attacks.\"<\/p>\n
Following the resignation of Soeharto in May, Salim's
\nbusinesses have shrunk significantly, precipitated by the
\ncollapse of its nerve center Bank Central Asia (BCA).<\/p>\n
BCA, once the country's largest bank, was taken over by the
\ngovernment in August following massive runs triggered by the fall
\nof Soeharto, which left it effectively insolvent. Two of
\nSoeharto's children -- Sigit Harjojudanto and Siti Hardijanti
\nRukmana -- were part-owners in the bank.<\/p>\n
BCA owes the central bank Rp 35 trillion in liquidity support,
\nwhich must be repaid in four years. In addition, the government
\nis also demanding Salim repay Rp 13 trillion in debts owed by the
\ngroup's affiliated companies to BCA.<\/p>\n
Some analysts questioned the government's way of recovering
\nloans to BCA and BCA's loans to the Salim Group of companies.<\/p>\n
Rizal Ramli of the Econit Advisory Group questioned, in a
\nrecent discussion involving Bank Indonesia Governor Sjahril
\nSabirin, the four-year time limit given to Salim and also other
\nbusiness groups to repay their debts to the government.<\/p>\n
Salim actually had enough capacity to pay its debts to the
\ngovernment in cash much quicker, he said.<\/p>\n
\"Salim's First Pacific, for instance, has the strongest cash
\nflow in Asia now. Recently, it bought a controlling stake in the
\nPhilippine Long Distance Telephone Company (PLTD) for over $700
\nmillion. Why doesn't the government give Salim a shorter time to
\nrepay its debt?\" queried Rizal.<\/p>\n
Sjahril responded that the central bank should give equal
\ntreatment to everybody and, therefore, it could not give a
\nshorter deadline to Salim and longer ones to others.<\/p>\n
Salim's Benny said it was a wrong perception that Salim had
\nthe money held by First Pacific.<\/p>\n
\"That is a wrong perception. Although First Pacific is cash
\nrich, that fund is owned by First Pacific as a public company,
\nwhich the (Salim) group has no right to because the group is only
\na shareholder,\" Benny said.<\/p>\n
\"Thus, although the group needs funds, First Pacific's
\nminority shareholders and the Hong Kong Stock Exchange will not
\nagree if First Pacific bails out the group by distributing
\nspecial dividends, for instance.\"<\/p>\n
He said First Pacific was now cash rich after it sold, in
\n1997, its ownership in Hagemeyer, the world's largest trading
\nfirm outside Japan, for $1.8 billion.<\/p>\n
First Pacific used the funds to invest in the region by buying
\nundervalued stocks like PLTD and Indofood. The company will
\ncontinue to look for prospective, undervalued stocks.<\/p>\n
He said the Salim Group would continue to meet its commitment
\nand obligations.<\/p>\n
To show its commitment to repay debts, Salim ceded its
\nownership in a range of domestic and foreign entities to the
\ngovernment, including a 10.18 percent stake in Indofood.<\/p>\n
Before the sale of Indofood, Salim held 62.66 percent of the
\nfood giant. After the sale of the 60 percent stake, the group
\nwill give the remaining 2.66 percent to the government.<\/p>\n
However, like any other company in Indonesia, Indofood is now
\nalso suffering from the crisis, triggered by a sharp devaluation
\nof the rupiah against the U.S. dollar.<\/p>\n
The rupiah has lost more than 65 percent of its value against
\nthe dollar since July 1997, when the crisis started to hit the
\ncountry.<\/p>\n
The fall of the rupiah has made explosive the cost of repaying
\nforeign debt in rupiah terms.<\/p>\n
And Indofood has $1 billion in debts, most of which is
\ndenominated in dollars.<\/p>\n
The company claims that 80 percent of its foreign debt is
\nhedged through dollar deposits or forward contracts at exchange
\nrates of Rp 2,330 to Rp 7,380 to the dollar.<\/p>\n
However, Anton Karlam, an analyst at Panin Securities, said
\nmuch of the hedging was done with its sister bank BCA, to which
\nIndofood owes much of its debts.<\/p>\n
\"Thus, by making Indofood a foreign company, it is very
\nunlikely that BCA will not honor its hedging contracts with
\nIndofood,\" Anton said.<\/p>\n
To reduce the debt burden, Indofood plans to spin off its
\nBogasari Flour Mills and then sell it to strategic investors.<\/p>\n
An Indofood analyst at BNI Sekuritas, Hera Primayani, said the
\nsale of Bogasari would definitely affect Indofood's performance.
\nAt least it would increase Indofood's cost of production because
\nit would have to purchase wheat flour at slightly higher prices
\nthan before.<\/p>\n
Nevertheless, Salim does not have many choices in this era of
\nreform but to sell Bogasari because it has long become a symbol
\nof monopoly and collusion between Soeharto and Soedono Salim,
\nYuri Sato said.<\/p>\n
Profits<\/p>\n
Salim's fortune is strongly connected with Soeharto. The start
\nof Salim's success story can be traced back to 1967, soon after
\nSoeharto came to power.<\/p>\n
With very little capital, Sato said, Liem's import-export
\nbusiness began reaping substantial profits. And within a few
\nshort years, he had, by the early 1970s, put in place the capital
\nfoundation for the business group that he was to build.<\/p>\n
The sources of Liem's profits were PT Waringin, a company
\nexporting primary products like coffee and rubber, and PT Mega,
\nwhich together with PT Mercu Buana (owned by Soeharto's half-
\nbrother Probosutedjo) held an exclusive right to import cloves.<\/p>\n
Liem entered the textile industry in 1968 by establishing PT
\nTarumatex, which contributed significant revenues to the group
\nuntil 1974.<\/p>\n
In 1969, Liem established PT Bogasari (renamed in 1970 PT
\nBogasari Flour Mills), which got the exclusive rights to mill
\nwheat into flour for the western part of Indonesia, including
\nJava and Sumatra, and which accounts for 80 percent of domestic
\nflour demand. Bogasari also received rare direct loans from Bank
\nIndonesia to build plants.<\/p>\n
During the early 1970s, Salim moved into the cement industry,
\nautomotive assembling, forestry, real estate and construction.<\/p>\n
The period from the mid-1970s to the beginning of the 1980s
\nwas a time during which the framework of the Salim Group as a
\nbusiness group came into being. Its banking and cement ventures
\nexpanded rapidly during that time. In 1978, the group's BCA
\nbecame the country's top private commercial bank; in 1983, the
\ngroup's cement companies became the largest domestic producers.<\/p>\n
Such growth secured the Salim Group's position as Indonesia's
\nlargest business group. Since then, the group expanded from a
\nimport-substation industry to an export-oriented industry. It
\nalso extended its production chains to overseas. Salim's overseas
\noperations centered in Hong Kong, the Netherlands and later
\nSingapore.<\/p>\n
The Salim Group was again saved by the government in the late
\n1980s after the latter bailed out its failing businesses, cement
\nand cold-rolled steel industries.<\/p>\n
Now, after experiencing some difficulties, Sato said, the
\nSalim Group would likely discharge its nonprospective businesses,
\nnotably automotive and cement, and concentrate on prospective
\nones, namely resource-based and export-oriented industries.<\/p>\n
\"When there are prospective investors bidding competitive
\nprices, I think Salim will relinquish its ownership in the cement
\nand automotive sector,\" she said.<\/p>\n
Nevertheless, Sato said, the Salim Group will continue to
\nanchor its core businesses in Indonesia because Indonesia is
\nstill its profit center for the near to middle term.<\/p>\n
\"I think Indonesia will remain Salim's profit center in the
\nmiddle term. Salim will become multinational but remain
\nIndonesia-based.\"<\/p>\n
Benny conceded that after internal restructuring, Salim will
\nnot be as big as before. But he noted that although the Salim
\nGroup will become smaller, it will definitely be stronger.<\/p>\n
\"The current economic situation is really the hardest we have
\never experienced. But we have to be realistic; in business and
\nalso in life, there are ups and downs. Survival is the key word.<\/p>\n
\"What we expect now is that our management will remain intact
\nand loyal to the group because our management team, which we have
\nnurtured for 25 years, is made up of professional managers who
\nare willing to work hard.\"<\/p>\n
Sato agreed, and noted that although Salim began its business
\nempire through collusion with Soeharto, it then grew to become a
\nprofessional business empire, run by professional managers.<\/p>\n
\"Unlike other groups, which normally face management problems,
\nSalim's management has become its strength. Its sole problem is
\nits close connection with Soeharto.\"<\/p>",
"url": "https:\/\/jawawa.id\/newsitem\/salim-group-makes-efforts-to-escape-from-onslaught-1447893297",
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