The Asian financial crisis of 1997, the near-collapse of Bank Central Asia (BCA) in 1998 and the Indonesian central bank's resulting cash injection led the Salim Group, the largest conglomerate in Indonesia and the owner of BCA, to surrender shareholdings in various companies to the Indonesian Bank Restructuring Agency (Ibra). This was intended to act as payment for liquidity support extended by the Indonesia government to BCA after a run on the deposits of the bank brought it to the brink of collapse.
One such operational company was Indocement Tunggal Prakarsa, of which the Salim Group has divested approximately 19% to Ibra since the beginning of the financial crisis (13% were held in the name of Holdiko Perkasa, an umbrella entity established by Ibra to hold the Salim Group's pledged assets). Besides these shares divested to the government, most of the Salim Group's Indocement shares had already been pledged to the holders of bonds (Polymax bonds) issued by a Salim Group company, Polymax International. Separately, the government held 25% of the Indocement shares in its own right.
Indocement is the country's second largest cement producer with a 35% market share. As a result of a sharply reduced domestic demand for cement due to the economic crisis, Indocement was forced to shift its focus to foreign markets and exports.
Rationale for seeking a foreign strategic investor
The search for a foreign strategic investor was motivated by different factors, such as Indocement's desire to improve its global marketing and distribution network and to become more competitive in foreign markets. It was also motivated by the Salim Group's need for cash to redeem $200 million of Polymax bonds (issued by Salim Group), prior to any event of default under such bonds being called. The government also had a large shareholding that it wished to sell (Ibra had set itself an ambitions target of divestments this year to improve the state budget).
Debt restructuring
Concurrently with the continuing negotiations with potential strategic investors, Indocement had been having regular meetings with the steering committee established to ensure that the interests of the creditors were represented in the $1.2 billion debt restructuring that Indocement was undergoing. As soon as Heidelberger had been identified as the chosen suitor, Indocement and Heidelberger began discussions with the steering committee to amend the terms of the restructuring to allow Heidelberger to acquire a majority shareholding in Indocement. This was necessary because the transaction involved Indocement issuing further shares and warrants, thereby diluting the security interests of the various creditors. Indocement's debt (together with the debt of Indo Kodeco Cement and Investama, which merged with Indocement immediately prior to the restructuring) was restructured on a set of financing terms on December 29 2000. These terms were restated with more favourable terms upon the entry of Heidelberger as a strategic investor in Indocement. The main effect of this was to change the repayment schedule, reduce the interest rate on the loans if certain debt levels are met within particular timeframes. It also meant that Indocement can receive "notional credits" against future principal repayments for any amounts it prepays and that restrictions on the payment of dividends will be lifted only once debt levels and/or financial ratios are achieved.
Key features of the transaction structure
During the nearly three-year period that Heidelberger had been in talks with the Salim Group to acquire a significant portion of its Indocement shares, the structure of the transaction changed on various occasions. Figure 1 sets out a summary of the final transaction structure.
| Figure 1: Transaction structure |
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To acquire a majority shareholding in Indocement, Heidelberger ultimately agreed to buy the Indocement shares of Mekar and Kaolin, two Salim Group companies, and those of Ibra and Holdiko. However, under a certain Indonesian Capital Market Supervisory Board (BAPEPAM) regulation (Regulation No.IX.H.1), Heidelberger would be required to make an offer for all Indocement shares if it acquired 20% or more of the issued share capital of Indocement. As a result, the transaction had to be structured in such a way as to fall within certain exemptions to the BAPEPAM regulations.
On April 18 2001 (Ibra completion date) Heidelberger acquired approximately 19% of Indocement from Ibra and Holdiko in consideration of a certain amount of money on closing, with the remainder to be paid as deferred consideration one year after closing. As government-controlled entities, this acquisition was exempt for tender offer purposes pursuant to Regulation No.IX.H.1.10(d) of the BAPEPAM regulations, such exemption having been originally introduced at the time of the Astra sale to make divestment of Ibra's portfolio more attractive to potential purchasers. It was imperative that Heidelberger established a sizeable cushion on which to acquire further shares in a proposed rights issue (another exempt transaction). The parties to the transaction had agreed that Heidelberger would acquire the rights to participate in the rights issue from Mekar, Kaolin, Ibra and Holdiko, and had received an undertaking from the government that it would not exercise or transfer its rights.
On April 24 2001 (rights issue date) Heidelberger acquired the rights referred to above and exercised the same in consideration of releasing Indocement from its obligation to repay exactly $150 million of debt (which Heidelberger had acquired in the market several months before). The acquisition of Indocement shares pursuant to the rights issue allowed Heidelberger to acquire a further 26% on April 24 2001, and to announce to the market that it had become a "controlling shareholder" of Indocement. This debt-equity swap was exempt for tender offer purposes, enabling Heidelberger to exceed the legal threshold without having to launch a mandatory bid for the shares of all non-selling Indocement shareholders. A complex formula was incorporated into the sale and purchase documentation to ensure that the exact size of the rights issue was such as would allow Heidelberger to exercise the rights it had acquired for exactly $150 million.
In addition to warrants that had been issued to various creditors pursuant to the debt restructuring referred to above, a further series of warrants (series C warrants) were issued automatically to holders of rights to participate in the rights issue who had not actually exercised their rights (including the government who undertook, as mentioned above, not to exercise its rights), provided that such holders had registered with a custodian bank. Any custodian bank was required to register with Kustodian Sentral Efek Indonesia (the Indonesian equivalent of Crest) as the warrants were issued in scripless form to be traded and exercised electronically. The warrants are exercisable at the same strike price as the rights (ie Rp1,200 ($0.12)/share) and are capable of being exercised at any time from October 26 2001 to April 26 2003. Various BAPEPAM exemptions were sought in relation to this warrants issue.
To acquire Mekar and Kaolin's Indocement rights and shares free from encumbrances two days after the rights issue date (principal completion date), the pledge over the Indocement shares in favour of the Polymax bondholders had to be released by Chase (the security trustee). Chase would not release such security over the rights until it had received the full cash amount to redeem the Polymax bonds. Heidelberger in turn would not release the cash until it had acquired Mekar and Kaolin's Indocement shares. These two factors led to the negotiation of an extremely detailed and sophisticated closing escrow agreement involving 12 parties, to protect all parties' interests.
In addition, Holdiko's Indocement shares were pledged to Ibra and Ibra would not release the pledge until it had first received the consideration from Heidelberger. As, for capital market regulatory reasons, this transaction had to occur four business days prior to the rights issue and six business days prior to the acquisition of shares from Mekar and Kaolin, there were complex arrangements within the escrow agreement to allow for the shares to be legally and beneficially transferred on the Ibra completion date, but with provisions for the re-transfer back of such shares and monies in the event that the rights issue did not occur. On the rights issue date, Heidelberger had instructed HSBC, as escrow agent, to send a Swift MT100 irrevocable undertaking to Chase that it would receive the bond redemption monies two days later so that Chase's consent in the escrow agreement to allow Mekar and Kaolin to assign their rights to participate in the rights issue to Heidelberger became effective.
On the rights issue date further security documents were entered, pursuant to which Mekar and Kaolin pledged their remaining Indocement shares to Heidelberger mainly as security for certain obligations of Mekar and Kaolin due to Heidelberger. As the shares, the subject of such pledge, had not yet been released from the pledge to Chase, the documents were signed on the rights issue date, but did not take effect until they were registered two days later. The transfer of rights and shares was further complicated by the fact that certain rights and shares were in scrip form and certain others were in scripless form, requiring two different procedures.
In addition to acquiring a majority stake in Indocement, Heidelberger agreed to grant the government a put option, to put on Heidelberger a certain number of Indocement shares. The number of shares subject of the put option are reduced pro rata in the event that the government exercises certain of the series C warrants that were granted to it pursuant to the rights issue. Reciprocally, the exercise by the government of all or part of the put options will decrease pro rata the government's capability to exercise all or part of the series C warrants.
The many legal and practical problems faced by the negotiating team, combined with the parallel debt restructuring and achieving the conditions precedent to its closing (on the preferred terms) simultaneously with closing the share purchases, made for a challenging task. Encouragingly though, even in unsettled times for Indonesia, complex transactions such as the Heidelberger/Indocement deal can be completed.