Multinational Finance Study Case

PT Semen Gresik
International Acquisition of Cemex S.A.
de C.V.
Presented by Group IV
Francisca Arini
Muhammad Prasetio
Tony Ferdyantara
 Background
• Cementos Mexicanos (CEMEX) from Mexico considers international
expansion in AsiaCase
• Asia Markets expansion in order to turn Cemex into a global player
• The first Asia market entry was in 1997 Philippines (30% stake in
Rizal Cement)
• New target: Indonesian market The timing was inline with the
Indonesian privatization
• Indonesian economy was open to outside investors and market
forces as part of promises to IMF (in exchange of economic &
financial assistance)
• CEMEX appointed Goldman Sachs to find suitable cement
company in Indonesia
 CEMEX S.A. de C.V
company profile
• Founded in 1906
• Largest cement manufacturer in the
Americas
• 3rd largest in the world (behind
Holderbank & Lafarge)
• Based in Monterey, Mexico
• Operated in 22 countries
• High operating margins
• Surviving Mexico economic crisis
 CEMEX S.A. de C.V
corporate strategy
Cemex’s corporate strategy

Cemex was also able to maintain its operating and EBITDA

margin over the tumultuous 1990s. The source of Cemex
efficiencies are combination of
 CEMEX S.A. de C.V
consolidated financial result, December 31,
in millions pesos
1993 1994 1995 1996 1997

Net Sales 25,759 27,687 33,924 35,540 38,464

Operating Income 6,269 7,431 8,100 8,482 9,088

Majority Net
4,637 4,951 10,045 10,319 7,725
Income
Earning per Share
4.39 4.60 7.81 7.95 6.01
(EPS)
Operating Margin
24.4 26.8 23.9 23.8 23.6
(%)
EBITDA 8,120 9,471 10,786 11,483 12,116

EBITDA margin (%) 31.6 34.2 31.8 32.3 31.5

 CEMEX S.A. de C.V
facts on ASIA expansion
• CEMEX had little experience in Asia
• CEMEX’s first direct operating activities was
in Philipine
• Cemex make acquisition of 30% stake in Rizal
Cement (Philipine) in Sept 1997 for US$ 100
million
• In early 1998, CEMEX directed Goldman
Sachs to find cement company in Indonesia
to be acquired for strategic stake
• Asian economic crisis resulted many firms
throughout Far East relatively cheap
• Is it the right time to buy in Asia?
 Semen Gresik
company profile
• Began producing in 1957
• Exploiting large and accessible limestone
deposit in East Java
• First government cement producer in Indonesia
to go public, issuing 35% of its share in July
1991
• Become the largest Indonesian cement
producer in 1995, purchased Semen Padang &
Semen Tonasa for a total of US$ 476 million
• Three companies still operated separately and
maintain independent administrative structure
 Key Issues
• Evaluation of Investment opportunities aboard to exploit
existing competitive advantage.
• Application of valuation techniques as the basic of
International acquisitions decision.
• Align an international expansion strategy with local
conditions in targeted region (e.g privatization of
emerging Asian economies).
• Concern on the complexity of cross border business
expansion.
 Cement Industry in Indonesia
an overview
• Cements are commodity with high transportation cost
• Cements are regionally segmented markets
• Most important market in Indonesia is Java
• Jakarta-dominated by Indocement, West Java-dominated by Semen Cibinong and East Java dominated by
Semen Gresik
• All producers were expected to se 1998 annual sales to fall by 40%
• The prospect in 1998 tend to be not clear
• Indonesian government deregulated cement market by abolishing the local guideline price system price (HPS)
• Price wars was expected to continue through the year of 2002
 Bagged Cement Price and Cash
Cost
Country Price
across
Ex Factory Asia,
Cash Cost asMargin
of June 1998
Gross Margin
(US$/ tonne) (US$/ tonne) (US$/ tonne)
(US$/ tonne)
Pakistan 55 29 26 47%
Malaysia 40 26 14 35%
India 46 27 19 41%
Philipine 39 23 16 41%
Korea 39 28 11 28%
Taiwan 54 30 24 44%
Thailand 38 20 18 47%
Indonesia 16 10 6 38%
Average 41 24 17 40%
 Valuation
• Industry specific valuation
1.Compare market value with some value derived of the
company’s financial statements.
2.Compare to precedent transaction ratios or comparable
firm ratios
• Discounted Cash Flow (DCF) Method :
Free cash flows discounted with weighted average cost of
capital(WACC) to obtain the Equity Value.
Valuation in Cement Industry
Valuation in Cement Industry
 Valuation
Market Cap EV/ EV/ EBITDA Price/ FCF Price/Earnin
(US$ Capacity gs
million)
Indocement 957.9 39 12.6 5.8 (27.9)
Semen 461.9 53 8.5 11.4 56
Gresik
Semen 49.5 65 5.5 0.5 (1.1)
Cibinong

INDONESIA 52 8.9 9.2 9.0

avrg
THAILAND 146 10.7 4.3 (2.2)
averg
MALAYSIA 55 11.5 8.4 (26.9)
avrg
PHILIPINES 58 4.1 4.2 5.5
 Valuation

• WACC and Cost of Equity

• Discounted Cash Valuation
Flow Valuation
 Valuatio
•
n
Discounted Cash
Flow Valuation
 Bidding on Semen Gresik
Cemex win the bid with combination offer :
1.A bid of US$ 1.38/share for 35% of SG’s shares held by
Indonesian govt (current share price : US$ 0.63/share , Ex rate Rp
9,150. On September 30, 1999 Cemex only own 25.5%)
2.Intention to add 16% from open market, in total will hold 51%
shares.
3.Government holds the right to sell (put option) Cemex its 51%
over 3 years –price of $1.38/ share + 8.2% per annum, Cemex
would hold 71% of SG and full control.
4.Additional contribution from Cemex to SG and Indonesian govt
approximately US$ 179 million
 Depressing Endings
• Political side
- Regional autonomy law was applied
• Local administrations aiming to control industries located in their region
• The ownership of Semen Padang was taken over by the West Sumatra
government in late 2001, even the legality was disputed by the central
government

- Fear of separatist revolted in West Sumatra

- Public concern regarding the fact that 57% of Indonesian cement
production already owned by foreign investors.
• Internal denial
1.Rumour of employees lay off (nearly 1500 of Semen Padang’s
operations)
2.Rebellion of Semen Padang’s management in 2002
 Depressing Endings
• In December 2003, Cemex desire to revoke the 1998’s
agreement and request assistance from International
Center of Settlement of Investment Disputes (ICSID) to
act as an arbiter. They are also demand to be awarded
substantial damages.
• On Juli 27, 2006 Cemex sold all of their shares to Blue
Valley Holdings Pte Ltd.
 Recommendations
• Three main points to be consider in international acquisition
decision
1.Target identification and evaluation
2.Project execution
3.Post merger integration
• Apply multiples and Discounted Cash Flow to value the target
• FCF should be generated from the most reliable discount factor
to measure the risk.
• Cross border expansion will most probably bring up the political
disruptions or intervention, restrictions and regulations.
• Qualitative and quantitative risks should be consider carefully
End of Presentation
Thanks for your attention