Hard sell as caution sets in

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Laksamarna Sukard

On September 11 in Indonesia, the eyes of the financial community were focused on the country's parliament. Several senior economic ministers, backed up by visiting officials from the IMF, were locked in a battle with politicians over the sale of a majority shareholding in the government-controlled Bank Central Asia.
Agreement from the politicians was the last obstacle holding up a $400 million IMF loan to Indonesia. That night, the main board of the Fund was poised to put the final touches to a new agreement to resume the bailout funding called off months earlier. The parliamentarians, after extensive lobbying, finally agreed to the sale of a majority stake in the bank. But over the 24-hour period the world changed as terrorists struck the World Trade Centre and the Pentagon. What looked then like a positive indicator of Indonesia's potential to commence a new economic takeoff with a genuine financial deal now looks like a seriously hard sell.
Bank Central Asia is Indonesia's second-largest bank and was built up over decades by Liem Sioe Liong, owner of the Salim group, and for many years southeast Asia's richest man. The ethnic Chinese businessman developed close ties with former Indonesian ruler Suharto in the 1950s and expanded his conglomerate over the years to include major interests in cement, noodles and flour, cooking oil, chemicals, plantations and television as well as banking. A second large conglomerate, the First Pacific Group, was set up in Hong Kong and Salim also had extensive interests in Singapore, the Philippines and China.
With two of Suharto's children as shareholders of the bank, Liem was viewed as the businessman with the closest links to the unpopular ruler. So when the former general was forced to resign amid rioting in Jakarta in May1998, Bank Central Asia suffered a run. After supplying the bank with extensive liquidity credits, the government took it over and it is now under the control of the Indonesian Bank Restructuring Agency, set up to recapitalize the collapsed banking sector and sell off surrendered assets.

Bank Central Asia is viewed as the jewel in its crown. "It's a great bank, a very attractive prospect," says Nicholas Cashmore, head of research at CLSA Jakarta. "But the outside macro environment is very negative now. Let 's say you're a big international bank which likes BCA: how do you convince your home board to spend $300m buying it? Country risk is already high and will get worse when new rules come in next year forcing banks to provision for emerging-market risk." Cashmore believes a regional bank such as Singapore's DBS or Taiwan's Fubon Bank might have fewer qualms, while still meeting the Indonesian government's criteria of respectability, transparency and willingness to pay a good price.
The ability to sell a 51% stake - albeit in two slices - should make the bank considerably more attractive to buyers, following the failure to sell a 30% stake in the summer. Immediately after his appointment as the new minister for state-owned enterprises, Laksamarna Sukardi, an ex-banker and close aide of president Megawati Sukarnoputri, cancelled that sale to strategic investors. A 10% stake had been sold through the market in July. The sale to strategic investors had attracted charges of corruption and stock manipulation along with suspicion that the Salim group was attempting to regain control of the business through the back door. Salim still holds a 7% stake in BCA, but is unlikely to remain involved after the new bidding. New investors will be required to confirm that they have no connection with the group.
This time Sukardi hopes things will be different. He has appointed Merrill Lynch and local house Danareksa as lead managers of the sale with instructions to find a top-quality buyer. Despite the fact that the controlling stake will be sold in two tranches, 30% first with a call option to buy a further 21%, Merrill emphasizes that the transactions may be as little as one week apart and that the government has a clear desire to offer control. The seller may try to get a better price for the second tranche, and the deal could be structured in several different ways to protect the investor.
The lead managers believe that those investors who may be interested will already be well informed about Indonesia's recent history and difficult transition to democracy. They point to the attractions of the bank: its high fee-based income, with the largest branch network and ATM network in the country, all linked by a Vsat system. This has turned BCA into an effective national payments settlement agency, with over 5 million customers paying bills through the network as well as making account transfers.
The bank enjoys a favourable deposit mix with savings and demand deposits making up 65% of total deposits. It was recapitalized with government bonds and is gradually replacing those with income-earning assets. Total loans rose 100% to Rp11 trillion ($962 million) in the year to last June and the bank made net profit of Rp1.1 trillion in the first half of this year, up 122% over the same period last year.
It has hired two new senior managers with experience at Citibank and Chase Manhattan Bank to set up a new credit department focusing on risk management and credit evaluation. "We feel BCA has a prudent and conservative approach to asset quality, as its non-performing loan coverage stood at 150% as of June 20001," says a report by Merrill Lynch banking analyst Alistair Scarff.
A successful sale is now crucial to the new administration of president Megawati, which is trying to refloat the economy with international help after two years of drift under her ousted predecessor. She now faces the twin down sides of domestic anti-foreign feeling in the wake of the bombing of Afghanistan, and increased caution by foreign investors about the wisdom of doing business in Muslim countries.
Can BCA attract a good buyer? Much could depend on events elsewhere over the next two months. Indonesia is a hostage to fortunes mostly outside its control.

Bank deleveraging has barely started

Abigail Hofman:

Hard sell as caution sets in

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