JP/4/PADANG

JP/4/PADANG

Going all out for Semen Gresik-Cemex deal

Vincent Lingga
Senior Editor
The Jakarta Post
Jakarta

The government should go all out to prevent the spin-off of
Semen Padang from the publicly listed Semen Gresik Group (SGG),
as demanded by a group with vested interests led by Semen Padang
management, which claims to represent the aspirations of the West
Sumatra people.

Should the spin-off take place, the credibility of the whole
privatization program, which is a core component of the nation's
economic rehabilitation, could be destroyed, and foreign
investors would shun resource-rich West Sumatra.

The group's arguments about the dignity of the Minangkabau
people with regard to their ancestral land and its concerns about
the risk of foreign cement companies abusing their market power
are entirely false.

The group has been using the spin-off demands as ammunition to
block the government from exercising its put option right to sell
its remaining 51 percent holding in SGG to Mexico's Cemex, which
now owns 25.5 percent of the company.

The current management of Semen Padang and other rent seekers
of the vested-interest group are scared of losing their lucrative
business if Cemex takes control of Semen Padang.

The issue has nothing to do with anti-foreign investor
sentiment among the local people. The group's real objective is
to retain Semen Padang as a cash cow that its members can milk
any time they like.

That is currently the status of Semen Padang because, despite
its acquisition by state-owned Semen Gresik in 1995, Semen Padang
remains an independent enterprise, with its own board of
directors and commissioners, having its own internal audit and
its own procurement and marketing system.

No wonder that Semen Padang, which allegedly is ridden with
collusion like many other state companies, is the worst performer
among the three cement units owned by SGG.

The other two units are Semen Tonasa in S.Sulawesi and Semen
Gresik in East Java. The three units together have a total
capacity of more than 17 million metric tons.

The SGG consolidated financial report for the year 2000 shows
that Semen Padang lost Rp 46 billion, booked the lowest operating
profit margin and suffered the lowest export prices. All this was
caused by questionable practices in its marketing and procurement
systems.

The SGG annual shareholders meeting in Jakarta in June
reprimanded the management of Semen Padang for its gross
inefficiency, questionable pricing policies, poor marketing mix
strategy and very poor communications and cooperation with the
other SGG members.

Recent reports from media in Padang and Jakarta showed how
leaders of the spin-off team, who included not only Semen Padang
directors but some legislators and businesspeople close to the
West Sumatra governor, had allegedly benefited either from
supplying materials to Semen Padang, local marketing or exporting
Semen Padang products.

The local people of West Sumatra, notably those in Lubuk
Kilangan subdistrict where the Semen Padang industrial complex is
located, do not really care who owns the company so long as it
creates maximum benefits for the local community.

Statements by the Lubuk Kilangan community on various
occasions, the last one in late September, demanded only that
Semen Padang concentrate on recruiting locally, assist the
community to establish a cement distribution company, implement
environment-friendly operations and contribute more to community
development.

However, since the spin-off team is much better organized and
more generously funded and able to meet with House leaders,
senior officials and newspaper reporters in Jakarta, the voice of
the vested-interest group has apparently been much louder.

By forging ahead with its put option to sell its remaining 51
percent holding in SGG to Cemex, the government would generate
multiple benefits for the three cement units and the whole
economy as well.

Among the immediate benefits would be:

o The best selling price of around US$1.72 per share, or more
than 275 percent of the current SGG share price on the Jakarta
stock exchange, bringing in about $520 million (Rp 5.2 trillion)
to the cash-starved government at negligible transaction cost.

o Facilitating full integration of the three cement units that
should have taken place in 1995 when Semen Gresik acquired Semen
Tonasa in South Sulawesi and Semen Padang, but failed to
materialize until now due to opposition from Semen Padang
management and some local leaders.

The synergy resulting from the integration would create great
benefits through much lower costs in financing, information-
sharing, elimination of redundancies in internal audits,
management, local and export marketing and procurement.

Most important of all is that the three cement companies would
be fully subject to stock market regulations, especially those
regarding disclosure and audit standards, and compliance with the
principles of good corporate governance.

o This landmark deal would kick start the process of regaining
foreign investor confidence in Indonesia at a time when the
country's risk premium is increasing due to local reaction to the
U.S.-led attacks on Afghanistan.

However, succumbing to the demands for spin-off from the
vested-interest group would wipe out whatever remaining
confidence foreign investors still had in the government's
credibility.

Much more devastating would be the flagrant violation of stock
market regulations because the spin-off would almost certainly be
rejected by the minority shareholders (Cemex and the investing
public, which holds 23.50 percent).

Equally damaging would be the legal entanglements caused by
SGG commitments to its domestic and foreign creditors, who
obviously lent to SGG on the merits of its business plans that
were based on the operational prospects of three cement units.

Semen Padang had, as of last December, outstanding debts of Rp
617 billion to ABN Amro Bank and Rp 281 billion to state Bank
Mandiri, entirely guaranteed by SGG.

With a spin-off, Semen Padang would have to renegotiate its
debts as a stand-alone company, obviously with a higher risk
premium, meaning that it would have to pay interest rates much
higher than the current ones under the SGG corporate guarantee.

An analyst concluded, after perusing the 2000 SGG annual
report, that the higher interest rates alone would almost double
Semen Padang's interest expenses to Rp 70 billion, or nearly 40
percent of its operating income.

No wonder that senior government officials have asserted that
the Semen Gresik deal could make or break both the whole
privatization program and the government's credibility,
especially as the most promising candidates among state companies
for privatization are resource-based enterprises that are located
in the provinces.

Meanwhile, Cemex understandably does not wish to continue in
uncertainty. Indonesia is not the only place for cement
investment for Cemex, which owns and operates 66 cement plants
and almost 500 ready-mix concrete and aggregates plants in North
and South America, the Caribbean, Europe, Africa and Asia.