Lippo's massive internal takeover gets mixed reactions

JAKARTA (JP): The Riady family's move to sell their shares, worth almost Rp 1 trillion (US$424 million), in Lippo Group's two major listed finance firms -- PT Lippo Bank and PT Lippo Life -- under the group's planned internal acquisition has received mixed reactions from analysts.

Analysts regard the internal acquisition as the family's way of cashing out their controlling stakes in the two finance companies.

The internal takeover plan, which will also involve the group's underwriting and brokerage company, PT Lippo Securities, will not benefit the investing public or the minority shareholders, the analysts claimed.

Under the massive acquisition plan, Lippo Securities will buy additional 27 percent shares in Lippo Life to increase its stock ownership in the insurance company to 32 percent, from 5 percent at present. The shares will be purchased from PT Lippo Asia, an unlisted investment company controlled by the Riady family at Rp 243.7 billion. The deal will be made with a cash payment of Rp 100 billion and 15-month notes with interest-free coupons.

Lippo Life will then purchase additional 40 percent shares in Lippo Bank to increase its share ownership in the bank to 45 percent, from 5 percent at present. The additional shares will also be bought from companies also controlled by the Riady family for Rp 657.83 billion under a similar payment scheme: Rp 100 billion will be paid with cash and the remainder with 15-month notes with interest-free coupons.

The internal acquisition, under the capital market law, is subject to approval from independent shareholders.

The deal, according to the group's announcement, is aimed at creating a better business synergy within the three finance companies because with the two-step takeover, the three firms will have a direct ownership link. Lippo Bank already owns a 10 percent stake in Lippo Securities.

The analysts, however, doubted that the takeover would enhance the business synergy, given that the three companies have been indirectly linked even without being engaged in such a massive takeover plan. The Riady family is the majority shareholder in all three companies.

Riady's reaction

James T. Riady, the eldest son of Mochtar Riady, rejected all the charges, saying that the internal takeover plan will even deepen the family's commitment to further strengthening Lippo Group's financial services.

"It is not a divestment and we are not cashing out our shares," he said.

James, who is being groomed to replace his father, said that his family will receive only around Rp 200 billion in cash from the nearly Rp 1 trillion transaction because the remainder will be paid in notes.

"In Hong Kong, the notes can be automatically converted to equity. We cannot do it here," he said, adding that due to such a constraint, the issuance of rights shares will be the most effective means for Lippo Securities and Lippo Life to repay the notes when their maturity is ended.

Under such a mechanism, the family will receive around Rp 700 billion in cash for the payment of the notes.

But James said the total funds that will be raised from the deal will automatically be "returned" to the two companies because the family, as the majority shareholder in both Lippo Securities and Lippo Life, will bear the larger part of the payment.

"We are committed to maintaining our controlling stakes," he said, dismissing the charge that the sales of his family's shares reflect his family's decreasing commitment in the group's financial services.

"Our stakes in the three companies will stay between 56 percent and 60 percent even after the deal is completed," he told The Jakarta Post on Saturday.

"We will never sell our shares in Lippo Bank to outsiders," he said, adding that the bank is not only profitable, but it also serves as the main base of other affiliates.

Asked if the internal acquisition would really strengthen the business synergy within the three financial companies, James said "the answer is certainly yes".

Largest

James said the takeover measure will allow Lippo Securities, which is at present 67 percent owned by the Lippo Group, either through its listed firms or through its unlisted companies, to become the country's largest investment bank, with total assets of around Rp 10 trillion, including those in Lippo Bank and Lippo Life.

The cross ownership to result from the deal will also enable Lippo Securities to use networks of more than 240 branches of the two companies at home and a number of their overseas branches.

"Lippo Life, in addition, will have a direct access to Lippo Bank's branches and clients. So will Lippo Bank," he said.

James acknowledged that the three companies have, in fact, been linked with the cross ownership of the family's shares, but such a link is "not formal".

"With the current tie-up, the relationship of the three companies is still limited," he noted.

In addition to the three companies, Lippo Group, controlled by the Riady family, operates four other listed companies: Lippo Industries, Lippo Land Development, Lippo Pacific Finance and Lippo Karawaci. The group, which also has a holding firm in Hong Kong, operates a number of unlisted companies at home as well.

Last year, the group's property development arm, Lippo Land, was reported to have suffered a financial problem due to the poor marketing of its township development projects. The financial trouble was also reported to have affected the group's Lippo Bank.

James said the Rp 200 billion in fresh funds to be immediately raised from the internal takeover would not be used to remedy the financial problem.

Lippo Securities's net profits totaled Rp 15.21 billion in the first six months of this year, an increase of 125 percent over Rp 6.74 billion in the same period of 1995.

James said that the net profit for 1996 is expected to increase by 180 percent to Rp 40 billion from Rp 14.1 billion last year. The company's profit in 1994 reached Rp 26.59 billion.

Lippo Life, which operates 121 sales offices with 5,200 agents nationwide, is expected to book a net profit of around Rp 46 billion this year and Rp 83.3 billion in 1997.

Lippo Bank's net profit is also expected to increase by 45 percent to Rp 120 billion this year, from Rp 83.75 billion in 1995. (hen)