Learning lessons from IBRA's asset sales

Learning lessons from IBRA's asset sales

Hidayat Jati, Business Researcher, Jakarta

The financial markets are in a nervous vigil. Is it because of
the "sweeping" threat made by Indonesia's loud but small radical
groups against United States citizens and assets? No. They are
nervous because by the end of the week they will see whether the
Megawati Administration, Indonesia's third government since the
breakout of the crisis in 1997, has the guts to finalize a major
-- and only -- national asset sale deal that will make or break
its recovery effort.

Yes, we are talking about the US$500 million sale of the
government's controlling stake at PT Semen Gresik Tbk to Cemex SA
of Mexico, which has been blocked for three years by vested
interests groups linked to the subject of the transaction.

Let's not recycle horror stories about financial and economic
disasters should the deal fail to materialize, though horrific it
will be if such a scenario does take place. Let's talk about the
good things. Let's talk about when the government, and its
banking restructuring agency (IBRA), actually managed to sell
some assets to bonafide investors.

Let's focus on these two deals focusing on these companies: PT
Indocement, a cement company, and the PT Sinar Plataco, a
mosquito coil company. These rare victories provide good lessons
during this Semen Gresik vigil.

[By the way, Salim Group, the omnipotent corporate player in
Indonesia from the early 1970's until 1998, controlled both
companies before IBRA took them over. The new owners of these
assets happen to be well-established European companies.]

Both deals clearly show that new capital and new managers
bring benefits beyond fresh cash. One major additional benefit is
that, under new ownership and management, the companies will be
run to generate shareholders' value, in contrast to the old
practices of subjecting the companies to various dodgey inter-
company transactions.

Put it simply, since the new owners had already paid so much
cash and/or other form of capital to acquire the assets, they
would want to run them in the way that would generate maximum
returns. Efficiency and good practice will prevail, all of which
should lead to greater profitability and tax receipts for
Indonesia. This is especially true in Indocement's case.

Other benefits of asset sales may also impact consumers and
society as whole. This is strongly evidenced in the Sinar Plataco
case, in which the benefits were far greater than the Rp 610
billion cash payment, anyway representing a premium price by any
measures, resulted by the transaction.

Under new management (which took control last April),
Plataco, which controls about 50 percent of the local market of
mosquito coil, will no longer use a hazardous chemical compound
as raw materials. The new owner, Reckit Bensckier, recently
revealed by implication that the Salim Group had been using a
type of pesticide, apparently illegal in most countries, in the
product practically throughout the New Orer years.
Those nasty chemicals, if inhaled, could endanger fetuses during
pregnancy. The Salims, indeed, were economic animals in a very
real sense.

Let's turn back to the Indocement case. Before the sale, the
Salims owned a 45.2 percent stake at the company. The Indonesian
government held 45.5 percent, mostly originated from a cash
injection from its coffers into the company in the 1980's under
the direct order of President Soeharto to help the company (In
those days the dogma was that what was good for Salim, among a
very few others, was great for the Republic).

The investing public held a mere 9.3 percent stake. Such a
holding structure by its very nature limits public scrutiny and,
inversely, opens the road for reckless management as well as
transfer pricing with other Salim Group entities.

Indocement was heavily leveraged when the government took
charge in late 1998. By the end of 1999 Indocement was carrying
more than a staggering US$1.1 billion in loans, including a
US$200 million bonds liability (the "Polymax bonds" -- for which
the proceeds, according to sources, did not exactly reach into
Indocement's coffers) and reported a Rp 66 billion operational
losses.

Without a debt restructuring, involving some sort of new
capital and ownership, Indocement would be bankrupt, in practice
if not legally (these things are not necessarily the same in
Indonesia, thanks to our judges and defense attorneys).

The "white knight" finally came in the form of a new owner:
Heidelberger Zement AG. The road taken was a complicated scheme
involving rights issue, put options and debt to equity swaps. Of
course, it was not a smooth journey.

There were battles of proposals and counter-proposals,
including one -- eventually rejected by the government -- that
would result in additional government capital injection.
Thankfully, the net result was a foreign investment totaling
US$300 million and an initial debt reduction by an estimated
US$200 million (more debt would be reduced from the proceeds of
divesting Indocement's non-core assets, such as coal mine and
investments in office buildings). Indocement, which employs
approximately 7,000 workers, was saved. The government, through
IBRA, even managed to make some money.

What happened to the Salims' holdings and their power over
this asset? Humbled to say the least. The Salims now control a
13.4 percent stake in Indocement, formerly one of their crown
jewels. Most of their executives, including the Soeharto-token
Sudwikatmono, the former president director, had been kicked
upstairs into the board of commissioners.

The ailing patriarch Liem Sioe Liong resigned. Anthony Salim,
the family heir and Indocement's deputy -- and de facto --
president director, no longer occupies a seat in the company's
executive boards. So far, among the firm's 7,000 workers, these
two Salims were the only people that were apparently made
"redundant" by the acquisition.

Indocement, moreover, would now use distributors that it 100
percent owns, as opposed to privately-held Salim entities.
Heidelberger now owns a 61.7 percent stake (there had been
reports that they would want to increase their holdings) and has
placed its delegates in key positions including the posts of
Chief Executive Officer and Chairman of the Board.

The story of Indocement has been a good one, though it is not
over yet. The Indonesian government still owns an estimated 10
percent stake in the company, which should be sold in the near
future, and there had been reports in the local media (Jawa Pos,
April 3 2001), that some Salim delegates in the company had
resisted Heidelberger's intention to use the European company's
overseas trading network to facilitate Indocement's exports.

The Salim delegate said he was concerned about the possibility
for the emergence of a "foreign cartel". Funny talk coming from a
conglomerate that thrived on government-sanctioned monopolies,
exclusive contracts and cartels.

Now back to present day. The government and the House of
Representatives, who had authorized the privatization program but
continued to block it, should learn that new capital and
management brings benefit much greater than cash. They can also
rid us of inefficient and unscrupulous players.