There Are Few Reasons to Expect Foreign Investment to Come Into the Country Either. Cemex

Indonesia

There are few reasons to expect foreign investment to come into the country either. Cemex of Mexico had to suspend its plan to increase its 25% stake in Semen Gresik after massive strikes at the cement maker. Private-equity funds such as Newbridge Asia which were once interested in Bank Central Asia -still yet to be sold off -have also lost enthusiasm for the country. The sale of Semen Cibinong to Holcim Ltd., a Swiss cement maker, is one of the few cases in which control has passed from an Indonesian tycoon to a serious industrial company from abroad.

IndoDraft

In March, Farallon Capital Partners acquired a 51% stake in Bank Central Asia, Indonesia’s leading private-sector bank, for US$540 million. It was hoped that the sale would rejuvenate foreign investment. Then, in October, a bomb exploded in a Bali nightclub popular with western tourists, killing over 200 people. It was immediately connected to a global campaign of terrorism being orchestrated by Osama bin Laden’s Al-Qaeda network and, as a result, the world’s most populous Muslim nation has been dragged into the War on Terror.

Fears of a terrorist uprising in Indonesia, justified or not, are unlikely to affect BCA’s business. In the short term the incident makes it difficult for Farallon to exit, but with the promise of healthy medium-term returns it is unlikely to want to. It fought too hard for the stake to give it up now. Throughout the bidding process a consortium led by Standard Chartered was touted as the favourite; as a British bank with a proven track record and wide experience in Asia most commentators considered it a certainty to take on the country’s most prestigious privatization since the financial crisis. Those commentators can’t have spent much time in Indonesia. US-based Farallon overcame its lack of recognition by tying up with a family of Indonesian tobacco tycoons and solved its credibility problems by signing a “technical assistance agreement” with Deutsche Bank.

While the bombing may not damage BCA’s profitability, it might scare the wits out of Farallon’s US investors.

Bank Central Asia

BCA figures:

FYE ’02 ROE = 47.3%

FYE ’02 ROA = 4%

More likely:

RoE of 22%

Indonesia's largest bank, Bank Central Asia, is privatized by selling it not to the well-run U.K. bank Standard Chartered but to an investment group suspected of having ties to the Salim family, formerly the top crony capitalists of the country.

July 1 2002

Even Indonesia, which has been decidedly reluctant to sell out to foreigners, is finally biting the bullet. Earlier this year, a consortium controlled by the U.S.-based private equity group Farallon Capital Partners LLC paid $540 million for PT Bank Central Asia, the country's premier private-sector bank. BCA has signed a technical-assistance agreement with Germany's giant Deutsche Bank, which has sent 10 execs to Jakarta to revitalize the bank. The strategy is simple enough: "We'll focus on risk management and credit control," says BCA's new President Commissioner Eugene K. Galbraith--rather than lending on the basis of connections.

March 20 2002

A team led by U.S. hedge fund Farallon Capital proved the surprise winner of Indonesia's largest bank last Thursday. Farallon came from behind to beat the favorite in the bidding, British bank Standard Chartered, for Bank Central Asia. That's despite Farallon's $531 million offer being lower than Standard Chartered's bid.

It was also the second time Standard Chartered missed out on breaking into Indonesia's banking big-time, after a deal to buy Bank Bali collapsed in December 1999. Analysts have scrambled to find out what they could about the Farallon fund, which does not have so much as a Web site. San Francisco, California-based Farallon has deferred inquiries to an outside spokesman.

So why did Indonesia pick Farallon in the most significant privatization since the country nationalized almost all its banks during the Asian financial crisis? Farallon is an $8 billion hedge fund. More precisely, it is an arbitrage fund, meaning its small team, some 40 strong, specializes in picking up strategic stakes in companies on the cheap. "They are one of the biggest and best-respected hedge funds in the United States," one trader who wished to remain anonymous told CNN.

The full name of the entity buying 51 percent of BCA is FarIndo Investments Ltd. The other part of the team is the Hartono family, which owns cigarette maker PT Djarum -- a company famous for its clove cigarettes of the same name. FarIndo, a joint venture holding company, pledges to let BCA operate under strategies put in place by current management. It has promised not to lay anyone off over the next two years.

What happens then is likely to depend largely on Farallon. Indonesia says the Djarum investors will hold less than 10 percent of the bank.

Farallon was founded in 1986 by investment banker, Thomas Steyer, and his connections at Goldman Sachs, where he worked at the time. After starting in mergers and acquisitions at Morgan Stanley, Steyer cut his teeth at Goldman during the go-go 1980s. He still has last call on all of Farallon's deals, as senior managing member of the partnership. His skill is risk arbitrage, or "risk arb."

Numerous hedge funds have set up to do that in the United States, so Farallon is looking further afield. Investment bankers say the best "risk arb" opportunities lie outside the United States right now. Steyer, who went to Yale and serves on the board of Stanford University's business school, where he got a graduate degree, now oversees a large pool of institutional and private money at Farallon. The cash comes from universities and the like, as well as personal stakes from very wealthy bankers. Those Wall Streeters are the type of people that author Tom Wolfe dubbed "masters of the universe" in his 1987 novel Bonfire of the Vanities.

Despite the pledge not to cut jobs, Farallon almost certainly has what is known as an "exit strategy," a way to get out of the investment at a set time, at a profit.

Investment industry insiders say that most likely means cutting costs and jobs in the end. That fear forced a delay in the sale.

Still, that does not necessarily bode ill for the bank. The BCA investment may well be the start of an influx of overseas cash. It certainly means Indonesia looks cheap to some. "They're very, very smart, and they've done their homework," the trader said. "The fact that they're buying stuff in Indonesia probably means that you should be doing the same. Or I should. Or the price is way wrong."

But there is a good chance the price is not wrong. "They just want to buy cheap assets. They want to get decent returns for their money," he explained. "If they can get a 15, 20, 25 percent [profit] with reasonable risk profile, between 70 and 80 percent in their eyes, they would be willing to take a shot."

The final decision seems to have made most of the main players happy. Farallon is being advised by Deutsche Bank, which likely helped win over the International Monetary Fund. Deutsche Bank's head of Asian operations, Hubert Neiss, used to work at the IMF and says he lobbied Indonesia on Farallon's behalf.

The IMF demanded the sale of BCA as a stipulation of its $4.5 billion loan program. Its lead representative in Indonesia welcomed the deal as an "important step" to recovery.

Still, Farallon's victory doesn't make everyone happy. One British fund manager called the result of the sale "disappointing." "They will sell on BCA in a couple of years, to make a quick buck," the Invesco fund manager told CNN. "It would have been better to have a bank buy it for the long haul."

Most observers have faulted StanChart for "missing out" on buying big in Indonesia again with BCA. But that may not be the case. London-based StanChart may have learned from its 1999 fiasco trying to buy smaller Bank Bali. It agreed to buy 20 percent with an eye toward a larger stake, then saw the whole deal sour amid scandal and accusations of graft. "I'm not sure about the [StanChart] bid and why they lost out," one lawyer who works with StanChart told CNN. "Probably they know more about Indonesia and the potential for icebergs below the surface."

Eventually, Laksamana Sukardi, Indonesia's Minister of State Owned Enterprises, pushed through the sale to Farallon. "It is hard to find fault with the process," one source close to the deal told CNN. "It's hard to say that it was anything but clear and transparent."

March 14 2002

Indonesia confirmed the shock news on Thursday that dark horse U.S. investment group Farallon Capital Management has won Indonesia's largest retail bank.

Laksamana Sukardi, the Minister of State Owned Enterprises, declared a team led by the San Francisco-based venture capital and fund management company as the winner.

That means British bank Standard Chartered has missed out on an opportunity to break into the Indonesian banking big time yet again.

It walked away from a deal to buy Bank Bali in December 1999, after first buying a 20 percent stake, then discovering wholesale irregularities at that bank.

Given its experience in Asia, StanChart had been heavily favored to pick up BCA, the main retail bank in Indonesia.

But Laksamana said Farallon is instead buying 51 percent of BCA at 1,775 rupiah per share. That comes out at $531 million.

It is well beyond the $450 million industry insiders had predicted.

A worker demonstration and political infighting in Indonesia has held up the long-awaited BCA deal.

Last Night I Had A Dream . . .
State Minister of National Development Planning and Chairman of Bappenas, Kwik Kian Gie, has come out strongly against the sell off of the government's majority shareholding in Bank Central Asia(BCA).. The piece below on the privatisation of BCA was published recently in Bahasa Indonesia in the Kompas newspaper.
"Whenever my thoughts are filled with a complicated issue that is being discussed on television, and in public discussions and talk shows, I suffer from troubling dreams that come to me in the middle of the night regarding the issue in question. Thus, during the night quite recently, I dreamt that I made a bid to buy BCA and won. In my dream, I made a bid for a 51 percent stake in BCA. The problem was that the purchase price of the shares was Rp 5 trillion and I did not have the necessary funds. So, I joined with several friends who were able to supply this sum of money and together our group gained control of a 51 percent stake in the bank. To fulfil the requirement that the consortium had to be in strategic partnership with professional bankers, I invited a prestigious foreign bank to join our little group.
For a long time, shares in BCA have been traded on the Jakarta Stock Exchange. Any individual, even someone like myself, say, could buy as many shares as they could afford at any time of their choosing. Through purchasing shares on the stock exchange, you do have to go to the trouble of forming a consortium and raising Rp 5 trillion. But shares bought in this way are simply an ordinary portfolio investment, providing benefits only through the payment of dividends and any capital gain through an increase in the market price of the shares.
Noentheless, from the point of view of return on equity (RoE), BCA shares are hardly unattractive. Based on equity capital of Rp 9 trillion, the return would be Rp 2 trillion. This represents an RoE of 22 percent, much higher than current interest rates. If we look into this state of affairs closely, it becomes clear that at least 70 percent of BCA’s revenue (before expenditure) comes from the government in the form of interest payable on bonds worth Rp 58.2 trillion. Immediately, my thoughts turn to the enormous value of these liquid assets. How can I get my hands on a share of it, I wonder? The high rate of RoE becomes meaningless.
Before this, I had thought that the development of BCA might have been conducted in the manner laid out by the experts from the IMF. They always said that the bank’s enormous losses were to be transformed into a low level of profit. It was never intenned that BCA should receive an incredibly high rate of interest on funds provided by the government. The intention was just to keep the bank afloat. To coin a phrase, if BCA were a man drowning in quicksand, it was not the government’s duty to pull him out and place him on dry land in a new suit of clothes. It was just to stop his head from going under.
The influx of funds was to be limited to a level that would allow BCA to generate a small level of profit, enough to keep it going from one month to the next. I once asked the IMF exactly what the benefit of their programme was. The IMF experts quickly shot back that it was intended to buy time. Given time, BCA was supposed to be able to attract deposits from members of the community in the form of savings accounts. That would require a certain level of expenditure, which would be funded by the interest payments from the government bonds. The funds gathered from this source would be used to provide credit to business at a higher rate of interest.
In the banking industry, the gap between these interest rates is called the ‘spread’. If this spread increases, then so will the bank’s equity capital. By setting conditions regarding the minimum volume of equity capital held by a bank, the remainder could be used to repay the bank’s debts through the redemption of government bonds. This presents no problems while BCA remains the property of the government. In effect, the repayments remain an internal government issue. When the value of the government bonds redeemed in this way eventually falls to zero, it would be possible to say that BCA had returned to financial health and was ready to be sold to the private sector. At this point, BCA would be ready to stand on its own two feet and operate on the basis of its own strengths, deriving its profits from its spread.