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