Semen Gresik entangled in a myriad of problems

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.