Indofood consolidates amid global crisis

Entrepreneur's Story

By: Agustinus Gius Gala

Globe Asia-15 November 2008. After a number of acquisitions during the past 12 months, PT Indofood Sukses Makmur Tbk., the world's largest instant noodle maker, is now entering a consolidation stage but doesn't plan to ignore opportunity if it knocks. In late August, Jakarta-listed Indofood became the talk of punters in the stock market amid rumors that the company planned to acquire a controlling stake in dairy producer PT Indolakto. A month later, Indofood announced it had signed a conditional sale-and-purchase agreement to acquire the company. “After this latest acquisition, we'll be entering a consolidation phase until the global financial condition recovers. We're feeling very full right now,” Indofood vice president director Franciscus Welirang told GlobeAsia late in September.

Indofood will acquire 100% of Singapore-based Drayton Pte. Ltd., which owns 68.57% of shares in Indolakto, one of the major producers of milk products in Indonesia, for $350 million. Indofood, which has paid 15% of the purchase value up front, hopes to be able to complete the transaction in December after securing approval from shareholders and authorities in Jakarta and Singapore.Franciscus says between 30-50% of the acquisition cost will be financed by internal funds, while the remainder will be funded with loans. He declined to provide details. The acquisition of Indolakto followed the purchase of sugar producer PT Laju Perdana Indah this year, and Jakarta-listed plantation company PT Perusahaan Perkebunan London Sumatera Tbk. (Lonsum) late last year.

The acquisition drive is seen by analysts as an effort by Indofood parent the Salim Group to regain some of its businesses lost in the wake of the late 1990s Asian financial crisis. The Salim Group, founded by tycoon Sudono Salim, one of Indonesia's richest men, had to unload some of the jewels in its crown including Bank BCA, Indolakto and plantation firms in the late 1990s to repay debts to the government. But under the leadership of Anthoni Salim, Sudono's son and group crown prince, who is also president of Indofood, the group last year began making new acquisitions both at home and overseas.The move followed a successful business restructuring at a time when strong commodity prices during the past couple of years and the region's relatively good macro-economic condition provided ample cash and a conducive environment for acquisitions.

Consumer driven

With the looming global economic recession and financial crisis, which has dried up liquidity markets and pummeled stock markets around the world, there are concerns that Indofood will be aversely affected. Franciscus plays down such concerns. The company's food business, which produces the popular Indomie-brand instant noodles and other consumer food products such as food seasonings, snacks and nutritional and specialty foods, will continue to deliver strong sales and profitability, he insists. He points out that the country's economy will remain strong, with growth projected at more than 6% both this year and next, driven by consumption.

Growth in demand for food products will be in line with economic growth, he predicts. “Spending will also increase during the general election next year, which bodes well for food companies.” Prices of raw materials have been falling over the past few months and Indofood also expects profit margins to improve as the cost of production declines, while the price of products will be maintained. In the first half of this year, Indofood's net profit more than doubled to Rp827.45 billion ($87.1 million) from Rp367 billion in the same period last year, mostly attributable to the strong sales of its food division. Sales of wheat flour are also expected to remain buoyant as demand for food products will increase during the election campaign.

Franciscus, who is also chairman of the Indonesian Wheat Milling Association (Aptindo), projects demand will grow by around 6.5% next year to 3.5 million metric tons in 2009 from an estimated 3.4 million tons this year. Lower flour prices will also push demand higher. Franciscus acknowledges the company's plantation unit may no longer enjoy the “extraordinary profit” of last year as prices of crude palm oil (CPO) have fallen. Analysts said however that the lower price of CPO will boost the profit margins of Indofood's cooking oil and fat products. The company had been planning to aggressively expand its agribusiness division, but the current unfavorable economic conditions may temporarily put a halt to this ambition. As part of consolidation, the agribusiness division will for the time being focus on planting unused land at its plantation concessions. “We still have a lot of planting to be done in the land we control,” says Franciscus.

Good reputation

Despite current tight liquidity condition, Indofood is optimistic that it will not find much difficulty in raising funds and loans to finance various activities, including the acquisition of Indolakto. “We have a good reputation,” stresses Franciscus. At the first semester of this year, Indofood also had about Rp4.8 trillion in cash reserves. For many business players, the current global economic downturn offers good opportunities to buy cheap assets so, despite the consolidation strategy, Indofood will not turn down opportunity if it comes along. “If there's a good opportunity, we're going to take it,” Franciscus said. Analysts agree that given the ample cash reserves and its strong credit worthiness, Indofood may just be able to do that.The analysts also welcomed Indofood's move to acquire Indolakto, which not only produces milk but also other dairy-based products. Danareksa Securities said in an October 7 note to investors that the acquisition is positive for the company's diversification strategy.

The prospects for the dairy industry are strong. Government data shows that milk consumption in Indonesia is still very low at 7.7 kg per year, the lowest in Asia, even though government campaigns and corporate advertising have been pushing milk consumption higher over the past five years. Indolakto, which has a number of popular dairy brands including Indomilk, Cap Enaak, Tiga Sapi, Orchid Butter and Indoeskrim, is the third largest milk producer in the country with 20% of the market after Nestle (25% market share) and Frisian Flag (22%). The analysts are still waiting for the acquisition details, particularly with regards to the loans Indofood will require. “Strong brands alone are not sufficient,” notes BNI Securities analyst Akhmad Nurchayadi.