Mon, 28 Apr 2003

Semen Gresik entangled in a myriad of problems

Vincent Lingga, The Jakarta Post, Jakarta

What a mess Indonesia's largest cement group, government- controlled and publicly-traded PT Semen Gresik, is now mired in.

While Heidelberger-controlled PT Indocement and Holcim- controlled PT Semen Cibinong, respectively the second and third- largest cement companies, have consolidated their operations, Semen Gresik has been beleaguered by its subsidiary, PT Semen Padang, since 1999.

Semen Gresik's predicament deteriorated sharply after a letter from State Minister for State Enterprises Laksamana Sukardi to West Sumatra Governor Zainal Bakar on April 16 endorsed the local people's wishes to split Semen Padang from holding company Semen Gresik and become a stand-alone state enterprise.

The letter actually does not have any legal significance because the authority to approve Semen Padang's split from Semen Gresik lies entirely in the hands of Semen Gresik's minority shareholders, namely Mexico's Cemex with 25.50 percent and 1,138 individual and institutional investors with 23.50 percent.

Unfortunately, the official announcement came at a time when public support for the proposal seems to be tapering off.

An increasing number of people in West Sumatra have realized that the vested interests of local and government politicians and Semen Padang management itself, rather than what is in the best interests of local people, has been the main factor behind the campaign since 1999.

However, Laksamana's letter will still embolden the spirit of the campaign's sponsors and send shivers through Semen Gresik's management and shareholders.

The latest government stance is actually more ambiguous than the position Laksamana took in late November, 2001, whereby the government would restore the status of Semen Padang to that of a stand-alone state company by acquiring the majority of its shares from Semen Gresik.

This policy never materialized due to the complex process of valuing the shares of Semen Gresik's three units and because the cash-strapped government simply does not have enough money.

Laksamana never revealed what really transpired when he met West Sumatra government leaders in Jakarta on April 14. Coordinating Minister for Social Welfare Jusuf Kalla acted as mediator.

But it was the meeting that prompted Laksamana to write the controversial letter, which analysts now term as a "meaningless political goody", to the West Sumatra government and people.

Whatever legal and financial avenues the government pursues to implement the split, the process will be costly and will take at least one year to complete.

Before the government orders Semen Gresik management to convene an extraordinary shareholders meeting to decide on the spin off, Semen Gresik's three cement units will first have to undergo legal and financial due diligence to determine their share values.

But even this step will face strong opposition from Semen Padang management, which has previously turned down a request from Semen Gresik to go through Semen Padang's books.

Only after the due diligence and share valuation will the government be able to package several alternative deals for consideration by the minority shareholders.

Analysts cite several alternative solutions:

Firstly, the government buys out Cemex's and the investing public's shares (totaling 49 percent) in both Semen Padang and Semen Tonasa. This route will cost the government hundreds of millions of dollars. The question is where the government will get so much money?

Secondly, the government sells the bulk of its 51 percent holding in Semen Gresik to buy Cemex's and the investing public's shares in the two cement units. But would Cemex still be interested in increasing its stake in Semen Gresik with a much smaller capacity (only 8.2 million metric tons as against 17.2 million tons now)?

Yet a more complex issue is that creditors of Semen Gresik's Rp 1.8 trillion (US$202 million) in medium-term notes may call on their loans because these debt instruments are tied to the government's ownership of 51 percent of Semen Gresik.

Still another potentially explosive issue is the political question as to whether East Javanese and politicians would approve of Semen Gresik being controlled by foreign investors. It is more likely that regional sentiment would be stoked by the process of spinning off Semen Padang and Semen Tonasa from Semen Gresik.

But whatever alternative deals are presented, the process of gaining approval from minority shareholders will not be easy as the investing public includes investors overseas. The minority shareholders will predictably demand hefty compensation for their investments.

But then, even if the spin off process complies with the Companies Act of 1985 and the capital market law, it will set a bad precedence that could set off similar separatist sentiment in other provinces, not to mention the devastating impact on investor confidence in the country.

Certain groups in West Sumatra, for example, might demand the spin off the Ombilin coal unit in that province from its holding company, publicly-listed, government-controlled PT Bukit Asam coal company that is based in South Sumatra.

Along this line of regional sentiment, other state-owned holding companies, which own and manage airports, seaports and mining units in various provinces, might also face similar political entanglements.