INVESTMENTS: Indonesian companies
Far Eastern Economic Review
Oct 8, 1998

Jakarta: Pulling Punches

By Salil Tripathi
932 Words


Jakarta wants everyone to believe that it really is getting tough with
the cronies of former President Suharto. And, indeed, the Indonesian
Bank Restructuring Agency has targeted some big businessmen of the
Suharto era who hold stakes in delinquent debtor-banks.

   But Ibra has not come up trumps so far. For a start, the
government-run agency has settled with only six of the 14 suspended or
closed banks. It has also failed to get tough with directors whose banks
violated lending limits to affiliated parties -- a criminal offence.
Instead of throwing the book at one such director, Mohamad "Bob" Hasan,
Suharto's golfing partner and co-owner of the collapsed Bank Umum
Nasional, Ibra is still negotiating with him, although he missed the
September 21 deadline to meet his debt-payment obligations. (Hasan's
office has declined to comment.)

 More worryingly, perhaps, Ibra has been seen as cutting a sweetheart
deal with Salim, Indonesia's biggest group, which has business links
with the Suharto family. Ibra settled 48 trillion rupiah ($4.4 billion)
of Salim's debt to the government by taking over shares in 104 of its
companies. Although Ibra insists otherwise, analysts who track the group
feel the restructuring agency wasn't aggressive with Salim.
  The reason the group is being treated with kid gloves: Pragmatism.
According to Brian O'Connor, a director at Lehman Brothers, the
investment bank advising Ibra in its negotiations with the group, Salim
employs 200,000 people in Indonesia -- including some of the country's
best professional managers. "Salim has the most widespread distribution
network in the country," adds an American banker in Jakarta. "If you
take that away, the company loses value."

   In addition, says a senior official familiar with the negotiations,
the group's chief executive Anthony Salim has done a superb job of
convincing the negotiators that his continued presence is integral to
maintaining the companies' value. Take him out and the companies are
worth nothing.

   A closer scrutiny of the Salim deal suggests that the government
accepts that view. Salim's managers will continue to run the 104
companies that Ibra has taken over, and the group will continue to hold
shares in them. Officials close to Ibra admit that the Salim group has
given up only a small proportion of shares in its key listed companies,
and continues to have co-ownership of some of the better assets.

   The Salim group has shed only 2.5% of its shares in Indofood, a
world-class noodle-maker; 20% of its shares in QAF, a Singapore-based
food-and-retail company; and 5% of its shares in First Pacific, a Hong
Kong-based property and financial-services firm. Brokers in Jakarta say
the group has also surrendered 10% of its shares in Indocement, which
makes a third of Indonesia's cement. Ibra will consolidate the Salim
companies in a holding entity in which the group will have a 25% stake,
and the agency the rest. The Salim group can buy back the firms from the
holding company in future, if it chooses.

   But, as President B.J. Habibie said recently, the government wants
cash, not shares. That might be difficult. According to a Jakarta-based
Indonesian banker, it is unrealistic for Ibra to expect banks to recover
large amounts of cash from debtors within its tight three-week deadline
that ended September 21. The government can either settle for shares or
prosecute. But O'Connor of Lehman Brothers argues that lawsuits would
take years to settle, and in the meantime the value of the assets would

   Neither the Salim group nor Ibra can disclose the exact value of the
assets until the government has completed due diligence. And this has
raised some suspicions regarding the deal. "This involves the biggest
corporate transfer ever in Indonesia, and includes some of the biggest
companies," says the head of research at a securities firm in Jakarta.
"The process is anything but transparent, and hardly what the new
Indonesia promised." But O'Connor argues that investment bankers don't
reveal the value of assets they intend to sell: "Our goal is to realize
the best price -- why should we divulge our valuations to potential

   In any event, many analysts consider corporate valuation an inexact
science. In the case of Indonesian companies, with their layers of
ownership and cross-holdings, it is even more difficult. "While valuing
a company, you have to make a lot of assumptions about the amount of
cash the business expects to generate in future, and the interest-rate
and exchange-rate environment at that time. That's particularly
difficult in the current climate," says Lin Che Wei, regional banking
analyst at SG Securities in Singapore.

   The assumptions, like the valuations, haven't been made public.
Listed companies make up only a small part of the settlement, so
analysts may have to accept what Ibra and the Salim group say is the
value of dozens of unlisted companies in which shares have changed
hands. O'Connor says that's where the best deals are, particularly in
the chemicals, coal mining and plantation industries.

   They had better be good. The current value of the shares surrendered
to Ibra in the four listed companies amounts to only about $160 million,
according to calculations by SG Securities -- far less than the $4.4
billion that the Salim settlement claims. This means the private firms
have to be of exceptional share value to make up the difference. If that
is the case, asks a European banker in Jakarta, why isn't Salim selling
them directly and paying Ibra cash? And why isn't Ibra insisting it do
so? Because Jakarta believes Indonesia needs Salim, and its business
savvy, and as such doesn't want to come down too hard on the group.