Bakrie expands without political favors

Bakrie expands without political favors

JAKARTA (JP): Spanning two generations, publicly-listed
diversified firm PT Bakrie & Brothers is continually expanding
its three core businesses. And all without having to seek or
wield political clout.

"None of our business is related to politics," said the
company's president, Tanri Abeng. "We enter only market-oriented
businesses, and our businesses are straight forward, not related
to any political powerhouse."

To illustrate his point, Tanri said Bakrie & Brothers used to
be involved in coffee trading, but abandoned its ventures because
the government introduced a quota system on coffee trading.

"We don't want our businesses to depend largely on government
rulings... We want our businesses sterilized from government
intervention. That's why, we do not enter the construction
sector, especially areas related to government projects," he said
in a recent interview with The Jakarta Post.

Currently, Bakrie & Brothers focuses on three core businesses:
telecommunications, plantations and infrastructure-related
industries. It also has a number of investments in the chemical
and power generation sectors.

However the company's chief commissioner, Aburizal Bakrie (who
is generally called Ical), holds the political position of
chairman of the Indonesian Chamber of Commerce and Industry
(Kadin).

"That's Ical's business. It has nothing to do with Bakrie &
Brothers," Tanri said. "I want to make it clear here that no
single business at Bakrie & Brothers is generated through Kadin."

He acknowledged, however, that Bakrie & Brothers sometimes
helps finance Kadin's activities. "That's because we consider
Kadin an important institution to strengthen local businesses.
That's part of our contribution to the business community."

Founded in 1942 as a tiny trading company, Bakrie & Brothers
survived a number of difficult eras: the Japanese occupation from
1942 to 1945, the Dutch return and ensuing clashes with the newly
established Republic of Indonesia from 1945 to 1949 and the
difficult economic circumstances during the 1950s and 1960s.

"Not many firms established before Indonesian independence
(1945) have survived and continued to grow until now," Tanri
said.

Bakrie & Brothers has experienced rapid growth especially
during the so-called New Order government under President
Soeharto, which started in the latter half of the 1960s.

"A business should follow the development of the market. And
Bakrie has been riding on the economic development of the New
Order," he said.

Ten times

In terms of economic scale, Bakrie & Brothers has undergone
monumental growth, expanding almost 10 times during the last five
years, after it entered the capital market in late 1989.

It may be a blessing for Bakrie & Brothers that Indonesia
started to seriously develop the local capital market in the
second half of the 1980s.

The capital market has really helped Bakrie & Brothers and
other companies. Many experienced rapid growth after they raised
funds through the capital market as they had a better capital
structure after going public.

"Whatever the reason, funding is very important for a company
to grow. Relying on banks for a company's funding is risky,
especially when business is not good and the company is
unhealthy," Tanri said.

He explained that going public has helped his company improve
the structure of its capital. Bakrie & Brothers' debt-to-equity
ratio, which used to exceed four to one before public flotation,
now stands at a healthy level of one to one.

During the last five years, Bakrie & Brothers experienced
tremendous growth in terms of assets, market capitalization,
turnover and net profits.

Total assets increased from US$168 million in 1991 to $180
million in 1992, $346 million in 1993, $1.17 billion in 1994 and
$1.4 billion last year.

The sharp increase in total assets in 1994 resulted from the
issuance of 189.5 million rights shares to the public in July of
that year.

Market capitalization increased from $36 million in 1991 to
$58 million in 1992, $162 million in 1993, $754 million in 1994
and $871 million last year.

The company's turnover rose from $83 million in 1991 to $104
million in 1992, $147 million in 1993, $339 million in 1994 and
$547 million last year.

Net profits fluctuated from $4 million in 1991 to $2 million
in 1992 before recovering to $12 million in 1993, $47 million in
1994 and $52 million last year.

"So, it is a spectacular development and growth during the
last five years," Tanri said, adding that Bakrie & Brothers has
also been growing and developing through strategic alliances with
its partners.

"Through alliances, our weaknesses can be covered by our
strategic partners. Like most companies in Indonesia, Bakrie has
limitations in funding, technology, human resources and market
access," Tanri said.

He explained that Bakrie & Brothers builds alliances with
international firms as "strategic" shareholders in the company,
and others with which Bakrie & Brothers forms joint ventures.

The strategic shareholders include the American International
Group of the United States and Japanese firms Itochu Corp.,
Mitsui & Co., Mitsubishi Oil and NEC Corporation.

The joint venture partners are PTT Telecom Netherland and PT
Telkom Indonesia in the telecommunications ventures, Transfield
Corporate for project management, Freeport McMoRan and BHP
Mineral in mining ventures, Kawasaki Steel in a steel pipes
venture, Mitsubishi Chemical in a chemicals venture, and Entergy,
Southern Electric and Tomen in power generation ventures.

In investment ventures, Tanri said Bakrie & Brothers takes
either a majority, equal or minority interest depending on the
specific circumstances.

When Bakrie & Brothers has the capital and is leading the
management and technology of a specific venture, it will take the
majority interest in the venture. Meanwhile, for sectors in which
Bakrie & Brothers' capacity is limited, it tends to take a
minority interest in the venture.

The sectors in which Bakrie & Brothers has the capacity to
manage include telecommunications, plantations -- especially palm
oil and rubber plantations -- and infrastructure-related
industries, especially the steel piping industry.

"In the plantations, we have a basic capacity. So, what we
need is to do is strengthen our capacity with new technology. In
the steel industry, especially in piping, we are leading. We
entered this business a long time ago, and Bakrie is now well
known for its piping business," Tanri said.

In Telecommunications, Bakrie & Brothers controls 97 percent
of PT Bakrie Communications Corporation, 100 percent of PT Multi
Kontrol Nusantara, 70 percent of PT Bakrie Electronics Company,
55 percent of PT Radio Telepon Indonesia and 74.1 percent of Link
Telecommunication Group Pty Ltd. in Australia.

In the plantation industry, Bakrie & Brothers owns 52.5
percent of the shares in publicly listed PT Bakrie Sumatra
Plantations, 95 percent of PT Bakrie Pasaman Plantations, 100
percent of PT Agrowiyana, 99 percent of the rubber trading firm
Lewis & Peat Ltd. of Britain, 100 percent of both of Lewis & Peat
Pte Ltd. of Singapore and Lewis & Peat Rubber Inc. of the United
States.

In infrastructure-related industries, Bakrie & Brothers holds
99 percent of PT Bakrie Pipe Industries, 70 percent of PT Bakrie
harper Corporation, 37 percent of PT Seamless Pipe Indonesia
Jaya, 51 percent of PT Trans Bakrie, 100 percent of PT Bakrie
Corrugated Metal Industry, 100 percent of PT Bakrie Tosanjaya, 50
percent of PT Braja Mukti Cakra and 100 percent of PT Bakrie
Building Industries.

Investment

Bakrie & Brothers has also made "strategic" investments in a
number of sectors outside its three core businesses, especially
in the chemical industry, mining and power generation.

It maintains a 20 percent stake in PT Bakrie Kasei
Corporation, 49 percent in PT Indocoopper Investama Corporation,
20 percent in PT Arutmin Indonesia, 20 percent in PT Bakrie Kasei
PET and 100 percent in PT Bakrie Power Corporation.

Tanri explained that the strategy to develop its core
businesses is by expanding, especially the telecommunications
sector, into overseas markets and by strengthening into
downstream and upstream stages, especially for the plantation and
infrastructure sectors.

Like other big businesses in developing countries, Bakrie &
Brothers is undergoing a conglomeration process at a time when
conglomeration is an anti-trend in developed countries.

To accommodate its conglomeration process, Tanri said, he had
developed a decentralized management system, in which each member
of the board of directors is responsible for one line of the
businesses.

"In terms of management, Bakrie is just like a multinational
company. As our businesses are very diversified, we manage our
divisions in the same way multinationals manage theirs," Tanri
said.

An analyst with a foreign securities firm acknowledged that
Bakrie & Brothers' strong management team serves as a positive
factor in attracting equity investors to invest in Bakrie &
Brothers.

However, the analyst said the company's diversified businesses
have discouraged investors as well as analysts to analyze its
performance.

"I think people still look into its telecoms division, it
remains the most lucrative in the long term. Everywhere telecoms
shares are sought after," the analyst said.

As for the plantations sector, it is very cyclical in nature
as many commodities are, the analyst said. "When its market has
reached maturity, it will not perform well."

He noted that Bakrie & Brothers' infrastructure division would
not perform well either, especially if it targets the oil and gas
industry. He suggested that it would be better off focusing on
the non-oil and gas sector, which still promises better growth.

"I think Bakrie, in general, is good. However, for such a
diversified group, investors tend to undervalue it because its
characteristics are difficult to understand," the analyst said.

He suggested that Bakrie & Brothers be more focused on a
specific sector so that it would be easier for investors and
analysts to cover and understand.

Restructuring

Sharing the analyst's view, Tanri said his company is
currently hiring a consultancy firm to conduct a study and sound
out possibilities for focusing its range of businesses.

When it is considered feasible, it is possible that the
company will restructure the capital framework in each line of
its businesses. It is also possible that Bakrie & Brothers will
become a pure holding company, with special holdings in each line
of its businesses, Tanri added.

Those special holdings -- Bakrie Communications Corporation,
Bakrie Pipe Industries and Bakrie Sumatra Plantation -- can raise
funds individually from the public through initial public
offerings. Sumatra Plantation has already done it.

Therefore, Tanri said, shareholders as well as investors can
enter into special holdings. Those who like buying plantation
shares can focus on Bakrie Sumatra Plantation, those who love
telecommunications shares can buy only Bakrie Communication
Corporation and those who prefer steel shares can buy Bakrie Pipe
Industries.

"We are still looking at the possibility of deconglomeration.
However, our business strategy will be the same, only the
structure might be changed to satisfy the market," Tanri said. (rid)