Strategic acquisition

Strategic acquisition

The acquisition by state-owned PT Semen Gresik of two other
state cement companies, Semen Padang and Semen Tonasa, last week
is a strategic move to help the government better manage the
cement market which over the past few years has often puzzled
consumers with questionable price rises.

The geographical dispersion of the acquired cement plants and
their better economies of scale after expansion will enable Semen
Gresik to help the government to prevent a geographically-
concentrated oligopoly in the cement market.

The acquisition deal will make publicly-listed Semen Gresik
the largest single cement producer with a total capacity of 10.8
million tons, or about 40 percent of the national capacity, as of
next year. The new capacity will be slightly larger than the 9.8
million tons currently owned by the Indocement group which is
controlled by the Salim group. But the state company will further
strengthen its position with a total capacity of almost 18
million tons when its four expansion units currently under
construction come on stream in 1997 and 1998.

The acquisition also will put Semen Gresik in a better
position to capitalize on the rapidly growing market because the
state company now has plants in the largest cement-consuming
centers. Plant location counts a great deal, especially for such
a commodity as cement whose freight costs take up a big portion
of the sales price.

Semen Gresik in East Java, which is expanding its annual
capacity from 4.1 million tons at present to 8.7 million tons in
1998, is well placed to cover Java. This island alone now
accounts for almost 70 percent of the cement market volume.

Semen Andalas (Padang) in West Sumatra, which is increasing
its annual capacity from three million tons to 5.4 million tons
in 1998, is well positioned to supply Sumatra that at present
accounts for 18 percent of the total domestic market.

Semen Tonasa in South Sulawesi with an annual capacity of 3.5
million tons is close to the eastern region where the market is
expected to grow faster than that in Java as development
activities are accelerated on the least developed eastern
islands.

The way the US$475 million acquisition and capacity expansions
will be financed -- largely through a three-for-one rights issue
which will raise around $655 million -- will further add to the
competitive edge of Semen Gresik. The equity financing will save
the company large interest costs.

Hopefully, as Semen Gresik gradually entrenches its market
position within the next two years, the government will be saved
from the annual "headache" of unusually steep rises in cement
prices. That, we think, is the strategic nature of Semen Gresik's
acquisition of the two state cement companies.

We have, though, a footnote regarding the highly commendable
transaction due to the changes in the schedule for Semen Gresik's
extraordinary shareholders meeting on the acquisition, which was
started but not finished last Tuesday. The sudden summons from
Minister of Industry Tunky Ariwibowo, which forced Semen Gresik's
President Fuad Rivai to rush away from his chairmanship of the
Tuesday meeting to meet with Tunky, raised eyebrows. And Semen
Gresik's explanations about the reasons for the postponement of
the shareholders meeting until Thursday were not clear and did
not exhibit the kind of transparency which a publicly-listed
company should show.

The unusual events, we think, make it quite clear that the
government has yet to learn how to manage state companies which
are listed on the stock exchanges.