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.