Semen Gresik's imbroglio

Semen Gresik's imbroglio

There is nothing substantially new, nor legally meaningful in
State Minister for State Enterprises Laksamana Sukardi's letter
of April 16 addressed to West Sumatra Governor Zainal Bakar, yet
politicians in this province had prematurely rejoiced, strongly
confident that Semen Padang would soon be spun off from its
holding company, publicly-traded Semen Gresik.

The letter in essence only states that the government, as the
51 percent owner of Semen Gresik, understands the aspirations of
the West Sumatra people, and therefore approves of their demand
for Semen Padang's spin-off from Semen Gresik.

The caveat, though, is that the letter also states that any
decision on the split shall be based on the provisions of the Law
on Limited Liability Companies and regulations governing publicly
listed companies. This means that government approval legally
does not matter at all because such a total separation shall be
approved by Semen Gresik's minority shareholders, who consist of
the investing public with 23.5 percent and Mexico's Cemex with
25.5 percent.

In yet another harsh reprimand to the current management of
Semen Padang, Laksamana's letter also instructs the board of
directors of this company to conduct a reorganization and
restructuring to improve its performance, which, according to
Semen Gresik, has thus far been the worst among its three cement
units.

The Semen Gresik group, which is based in Surabaya, consists
of Semen Gresik with an annual capacity of 8.2 million metric
tons, Semen Padang in West Sumatra with 5.5 million tons and
Semen Tonasa in South Sulawesi with 3.48 million tons.

A number of politicians and government leaders in West
Sumatra, allegedly with full support of the Semen Padang
management, have been campaigning since 2000 for Semen Padang's
separation from Semen Gresik, arguing that the dignity of the
West Sumatra people, who had "surrendered" their ancestral land
to Semen Padang was hurt when Cemex bought into Semen Gresik in
late 1998. Semen Gresik wholly owns Semen Tonasa and 99.99
percent of Semen Padang.

But most analysts and Semen Gresik directors believe that the
groups's real objective is to hold on to Semen Padang as a cash
cow they can milk anytime they like.

Earlier reports from the mass media in Padang and Jakarta told
of how leaders of the spin-off team included not only Semen
Padang directors themselves but some legislators and
businesspeople close to the West Sumatra governor who all had
allegedly benefited either from supplying materials to Semen
Padang or taking part in locally marketing or exporting Semen
Padang cement.

The local people in West Sumatra, notably those in Lubuk
Kilangan subdistrict where the Semen Padang industrial complex is
located, do not care who owns the company as long as it creates
maximum benefits to the local community.

Statements by the Lubuk Kilangan community on various
occasions, notably in September 2001, demanded only that Semen
Padang emphasize local recruitment, assist them to establish a
cement distribution company, implement environmentally friendly
operations and contribute more to community development.

Semen Gresik shareholders have endeavored to replace the
present management of Semen Padang since 2001, citing their
utterly poor performance, but the management clung to their
position and rejected an extraordinary shareholders meeting. This
case is now awaiting a ruling from the Supreme Court.

Certainly, Semen Gresik's minority shareholders will not agree
on the spin-off, because such a move would damage the value of
their investment. When they bought Semen Gresik's shares, the
share price was based on the earning potential of a company with
an annual capacity of 17.1 million tons.

If the government pressured these minority shareholders to
agree on the split, that would amount to an act of
nationalization that would not only set off a messy litigation
process, but also would scare off domestic and foreign investors
in all sectors for the future.

Even if the minority shareholders somehow agreed to a spin-
off, they would certainly demand compensation that could amount
to hundreds of million of dollars. How could the cash-strapped
government afford this?

The government can do whatever it has within its power -- and
is legally allowable -- according to the stock exchange
regulations to meet any legitimate demands from the West Sumatra
people regarding Semen Padang.

However, succumbing to the vested interest groups' demand for
a spin-off in violation of the laws would wipe out whatever
little confidence investors still had in the government's
credibility.

Much more devastating is that a forced separation will violate
stock market regulations and could set off a wave of disputes
over state companies, which have been partially privatized.

Moreover, not a single investor would touch state companies or
banks that are now in the final preparations for strategic sales
or initial public offerings on the Jakarta Stock Exchange.