The Semen Gresik dilemma

The Semen Gresik dilemma

By Vincent Lingga

JAKARTA (JP): The cash-starved government will raise almost Rp
5 trillion (US$520 million) if it exercises a put option to sell
its 51 percent stake in the Semen Gresik cement holding company
to Mexico's Cemex before Oct. 26.

Since the price to be paid by Cemex will be almost twice as
high as the current Semen Gresik share quotation on the Jakarta
Stock Exchange, and given the big hole in the state budget, the
option should be too good a deal to let pass.

But what should be a landmark deal for its own assets is now
bogged down in an imbroglio which, if not resolved, could scare
the hell out of foreign and domestic investors and heighten
Indonesian sovereign risks.

The government on Wednesday asked Cemex to extend the deadline
to provide it more time to solve the problems with Semen Padang
and Semen Tonasa.

"... we are seriously considering (the request)," Cemex
Indonesia's president Francisco Noriega said on Thursday.

The roots of the problem are the demands from the people in
West Sumatra and South Sulawesi that the government spin off the
Padang and Tonasa plants from Semen Gresik.

Former president Abdurrahman Wahid, apparently in a bid to
appease regional disillusionment, approved the demands in
February 2000 without realizing the grave consequences of his
decision on Semen Gresik as a publicly-listed company and on the
government's credibility regarding the sanctity of contract.

Spinning off the two cement units, which account for almost 60
percent of Semen Gresik's total production capacity of 18 million
metric tons, will not only hurt the interests of the investing
public and Cemex which own 23.46 percent and 25.53 percent of the
company, respectively.

Such a drastic corporate measure is not within the
government's jurisdiction, but rests with the minority
shareholders to decide. That is if the government does not want
to violate the securities market rules which it has pledged to
enforce to strengthen the capital market.

Both the investing public, which bought Semen Gresik shares,
and Cemex, and which acquired its holding through a competitive
bid in 1998, put their money in the government-controlled company
primarily because of its major role (a 37 percent share) in the
country's total cement production capacity of 46 million tons.

Obviously, if the two subsidiaries were spun off, Semen Gresik
would become a much smaller company. Such a faulty deal would
also be a bad precedent for the government's privatization
program -- a core element of its economic reform program.

The demands for the spin-off appear to be based on strong
nationalistic sentiment against foreign investors. In this case
it is Cemex, the world's third-largest cement group with more
than 65 plants, which last year produced 80 million tons of
cement, in more than 30 countries throughout Asia, Africa, Europe
and North and South America.

But the central issue actually boils down to what the local
people see as unfair distribution of the pie.

Like many other legal entanglements encountered by companies
in various provinces, Semen Gresik faces one of the time bombs
left behind by the authoritarian, centralized government under
former president Soeharto.

"I had warned then finance minister Mar'ie Muhammad against
the grievances ... before he approved the acquisition of Semen
Padang (in West Sumatra) and Semen Tonasa (in South Sulawesi) by
Semen Gresik in 1995," asserted Basril Djabar, chief editor of
the Singgalang daily in Padang.

All three cement companies were then wholly owned by the
government. As no one dared to argue with Soeharto, the deal went
ahead despite the deep dissatisfaction of the West Sumatra
people, added Djabar, who says he is a member of the West Sumatra
team fighting for the locals' interests in Semen Padang.

The problem, he said, is that the local people had been
willing to cede their traditional property rights to 400 hectares
of limestone quarries to Semen Padang out of their high sense of
solidarity to support national development.

"But when Semen Padang was acquired by Semen Gresik and later
privatized, that was an entirely commercially-motivated deal,
which had by no means been in the minds of the Minangkabau people
when surrendering their land," he said.

"What further angered the people was that the commercial
transactions were then concluded without taking into
consideration any sort of compensation for them. This severely
bruised the dignity of the Minangkabau people," he added.

Djabar hastily added that the demands do not in any way
represent negative sentiment toward Cemex, nor against other
foreign investors. The local administration and people have
worked hard to make West Sumatra the most hospitable place for
both foreign and domestic investors, he said at a meeting with
Cemex Indonesia's president Francisco Noriega and vice president
Vicente Saiso.

Djabar said the West Sumatra legislature had delivered a
petition to President Megawati Soekarnoputri early this month
again demanding the government divest Semen Padang from Semen
Gresik.

"The spin-off will return Semen Padang to a wholly government-
owned company; only then can we sit down again to negotiate a
win-win settlement," he said.

The South Sulawesi people imply that their demand for the
spin-off could be compensated with an equity stake in Semen
Gresik.

"My monitoring of the people's aspirations concludes that they
see the price paid by Cemex for Semen Gresik shares as too
cheap," said Bunyamin, the Jakarta correspondent of the Makassar-
based Fajar daily newspaper, at the same meeting.

Noriega categorically denied that Cemex bought Semen Gresik at
a fire-sale price, pointing out that it won the stake through a
competitive bid and paid $1.38 a share, a 127 percent premium
over Semen Gresik's share price on the Jakarta Stock Exchange.

"We were invited by the government to contribute to the
country's development and we joined Semen Gresik in good faith,"
Norieg said, "believing that with the broad and strong base of
our skills and technology, and our good track record in operating
more than 60 cement plants around the world, we will be able to
cultivate Semen Gresik to become a world-class cement company."

He said sound business profit is surely the primary motive,
but that this was a long-term objective because when Cemex bought
into Semen Gresik, Indonesia was at the height of its political
and economic crisis, its cement industry suffering from a huge
excess capacity due to the plunge in demand.

"In fact, based on Semen Gresik's share price now, we suffer,
on paper, a loss of $80.2 million, meaning that the market value
of our stake is now 38 percent less than our initial investment
in 1998. But we had anticipated this because we invest with a
the long-term perspective," Noriega said.

Cemex's agreement with the government in 1998 requires the
Mexican company to pay $1.72 per share, almost twice as high as
Semen Gresik share quotation now, if the government exercises its
put option for its remaining 51 percent stake.

Noriega added that Cemex has also greatly contributed to
expanding Semen Gresik's exports to new markets and even to
countries where Cemex has cement operations.

"Semen Gresik's exports increased 137 percent in 1999. Semen
Padang exports alone expanded by 145 percent, of which 66 percent
were generated by Cemex's trading networks," he said.

Given the desperate need for foreign investment and the fact
that until now not a single cent of the Rp 6.5 trillion targeted
from the sale of state companies has been raised, the government
should do its best to resolve the issue with locals in the two
provinces.

Allowing the spin-off, even with adequate compensation for the
investing public and Cemex, which could reach hundreds of
millions of dollars, would amount to acknowledgement that the
government had sold a company with legal problems to the public
and foreign investors.

This would not only sabotage the whole deal with Cemex, but
would cast great doubt over the whole privatization program as
well as the government's credibility regarding the contracts it
has signed. Still more damaging, the government could land itself
in a messy litigation case filed by the investing public.

The writer is a senior editor of The Jakarta Post.