Salim's asset sale

Salim's asset sale

Critics reacted negatively to Indonesian Bank Restructuring
Agency's (IBRA) instruction to PT Holdiko Perkasa last week to
sell by year's end 17 equity assets, with most considering it an
irrational move that could result in a fire sale at a great loss
to taxpayers.

Many are greatly concerned that speeding up the sale of these
companies within such a short period of time would not only
result in an unacceptably low recovery rate, but could also be a
deceptive move to help the former owners (Salim) reacquire the
companies at only a fraction of their actual market value.

The assets are the remainder of 108 operating companies ceded
by the Salim Group to IBRA under a master of settlement and
acquisition agreement in September 1998, to pay off the
conglomerate's Rp 52.7 trillion (S$5.8 billion) debt to the
government. Holdiko is the holding company set up by IBRA to
manage and eventually sell the assets and transfer all sale
proceeds to IBRA.

IBRA Chairman Syafruddin Tumenggung did not explain the
reasons behind his order to expedite the asset sale through only
one-stage bidding, which will consist of eight steps:
announcement of the sale, distribution of limited info memos,
data room due diligence, management presentation, site visit, bid
submission, bid evaluation and selection of the winning bidder
and the closing.

But the master of settlement and acquisition agreement between
IBRA and the Salim Group happens to end later this year.
Moreover, Tumenggung has often hinted at plans to close IBRA much
earlier than February 2004, when the agency's mandate is
scheduled to end, and to close Holdiko's operations by December.

The great concern about disastrously low sale prices is
legitimate, especially now when most investors are still jittery
about Indonesia. But further delay could inflict even greater
losses due to the worsening quality of the assets and lost
opportunities to strengthen market confidence in the economy as a
whole.

We also find it hard to believe that the assets, which are all
ongoing concerns, could improve their performance under the
management of Holdiko and the supervision of IBRA, which are both
notorious for alleged corruption and collusive deals.

Tumenggung's firm decision to expedite the sale of the assets
should therefore be welcomed as an important initiative to remove
the companies as soon as possible from the state of limbo they
are now in.

The problem is that as long as the enterprises remain under
Holdiko and IBRA, it is not clear who really owns them; the two
government entities or the creditors. Without a clear ownership
status, these companies cannot regain access to bank credit
lines, and without working capital loans these firms cannot
operate at full capacity.

In the absence of a clear ownership status, the current
management simply does not have any incentives to improve the
companies' performance. Only after this issue is resolved will
these enterprises have a good chance of undergoing real
restructuring by new investors.

Certainly, assets that consist of plywood, textile and
garments, vegetable oil and fat companies, property and
industrial estate developers and a flour mill will not be able to
fetch high prices, given the fragile condition of the economy and
investor concern about legal certainty.

IBRA and the House of Representatives have even agreed on a
range of 20 percent to 38 percent of book value as the highest
recovery rates likely to be gained from the assets held by IBRA.

Holdiko and IBRA should be given the benefit of the doubt to
push ahead with the expedited asset sale. As long as all the
steps set for the one-stage bidding are conducted through an
open, fair and competitive process and the bid prices submitted
fall within the range of expected recovery rates, the
transactions should be allowed to be finally closed before the
end of the year.

But from the outset IBRA and Holdiko should open themselves
widely to close scrutiny in a bid to gain market confidence and
political trust with the transactions.

A successful closing of the sale of the 17 companies would not
only bring in revenue to the government, but also improve
investor confidence in the economy.