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Trouble at The Mill
Trouble at The Mill
Facing a crushing debt burden, Thailand's Charoen Pokphand Group is
selling stakes in some of its subsidiaries in the hope of safeguarding its
By Michael Vatikiotis in Bangkok with Alkman Granitsas in Hong Kong
and Pamela Yatsko in Shanghai
May 28, 1998
C haroen Pokphand, Thailand's largest business group, is driven by
the vision of one man: group Chairman Dhanin Chearavanont. He sees
C.P. as the ultimate consumer-products company, marrying imported
technology to local market knowledge and staying one step ahead of the
That strategy worked fine in times of rapid economic growth. Today,
however, the Asian credit squeeze has brought the C.P. Group a
heartbeat away from defaulting on its huge debts. Across the
region--from China to Thailand and Indonesia--the mammoth
multinational is in deep trouble, suggesting that it diversified and
expanded too rapidly, particularly in China.
The first signs are that C.P. is meeting this challenge with the pragmatic
flair that helped the Chearavanont family build the group from a humble
shophouse 70 years ago to a global business with sales of $9 billion in
1997--mostly from agribusiness--up 12.5% from the year before. Now,
pragmatism has prompted the group to sell off marginal subsidiaries to
raise more cash, as well as stakes in its retail businesses. "C.P. is
resolved to safeguard its core businesses," Dhanin said in a written reply
to questions put by the REVIEW. In short, the group is adopting a
But crunch time could be coming. On May 29, the group's Hong Kong
subsidiary, C.P. Pokphand, meets with a group of creditors in an effort to
stave off default on a five-year, $100 million floating-rate note. The listed
unit announced a month ago that it could not meet creditors' demands for
repayment of the $92.8 million principal.
Although this is only a small portion of the group's total debt, the issue
is critical: Default will mean that the Hong Kong subsidiary would no
longer be a major vehicle for the group to raise money offshore for its
projects in China, Indonesia and the U.S. (To date, C.P. Pokphand has
borrowed roughly $1 billion in loans and debt issues to help fund those
projects.) C.P. Pokphand's shares suffered a steep fall in value--from
HK$3 to around HK$0.79--on the initial news that it would have trouble
repaying the principal.
C.P. executives maintain that the group's credit is good, based on the
value of its assets. But Dhanin himself acknowledges that the group has
been affected by the regional economic crisis, mainly because currency
devaluations have increased the burden of loans denominated in U.S.
dollars. The liquidity squeeze has also made it difficult for the group to
mobilize new funds in any currency. Testifying to this, a source in the
company says that C.P. managed to get a $60 million credit line from the
Exim Bank in Thailand "only after some arm-twisting," and that banks are
lending to the group's agribusinesses on a month-to-month basis.
How C.P. Pokphand handles negotiations with its creditors may be a
harbinger of things to come: Over the next 13 months the company must
meet three other obligations that are either maturing or could face early
redemption demands by creditors. A HK$56 million ($7.2 million)
floating-rate certificate of deposit falls due in June and a $45 million loan
matures next February. Another $135 million floating-rate note issue
matures in 2001 but could be called in by creditors as early as June 1999.
In Indonesia, another subsidiary plans to present a debt-restructuring
plan this month that would defer for one year payment on a $400 million
The liquidity crunch has been compounded by banks that can't or won't
disburse already promised lines of credit. In Thailand, a $150 million
syndicated loan pledged by a consortium of 21 foreign banks last July
has yet to be disbursed. In China, financing of around $240 million for a
shopping mall in the Pudong district of Shanghai was dependent on six
Thai banks which can no longer disburse the funds because of their own
problems at home.
C.P. Group executives portray these problems as a byproduct of the
financial crisis, not as a sign of anything intrinsically wrong with the
group. They say that the early redemption demands on C.P. Pokphand in
Hong Kong were initiated by troubled South Korean banks holding a
small part of the $100 million floating-rate note. Forced to raise cash
quickly, the Korean banks exercised their "put option"--basically an
escape clause--and demanded the money back three years into the
The creditor group includes three Korean banks, which hold $19 million
worth of the notes. Among them is Korea First Bank, one of the country's
sickest banks which was bailed out by the government late last year.
"Because Korean banks, including my bank, are now in big trouble . . . it
is only natural that we wanted to redeem the floating-rate note," says an
executive with one of the banks.
He insists that C.P.'s credit status had no bearing on the bank's decision
to call in the money: "The company is the best in Thailand and the
owner, Mr. Dhanin, is very respected in the business world. I couldn't
imagine the possibility of a default."
Nevertheless, C.P. executives are extremely nervous. The group's first
line of defence has been to begin selling operations outside its core
businesses. In China, it has agreed to sell an indirectly held 50% stake in
a motorcycle-manufacturing venture to its Chinese partner in the venture,
which should raise $12.8 million. The Shanghai Mila Brewery is also on
offer to Dutch partners Heineken. (C.P. has over 200 ventures in China
where it derives 20%-30% of its total revenues.)
Closer to home, C.P. is looking for stakeholders in its successful retail
operations. Britain's Tesco has agreed to acquire a 75% stake in Lotus
Superstores, C.P.'s chain of 13 hypermarkets in Thailand. Tesco will pay
£111 million ($180 million) in cash for the stake and will assume £89
million of Lotus's debt. Just as important, the British chain will advance a
£16 million loan to the C.P. Group secured against its remaining stake in
Lotus. Meanwhile, as many as a dozen potential buyers are negotiating
for a portion of C.P.'s profitable 7-Eleven franchise.
Some analysts consider these businesses part of C.P.'s core, and say it
underlines how bad the situation must be. "They would like to keep
these operations as part of their core business, but it's very easy to sell
off right now and they need the money," says a Bangkok-based retailing
executive. Dhanin claims the strategy is motivated by "the need to bring
in new resources in terms of capital and know-how in order to strengthen
Not for sale is the group's telecommunications arm in Thailand,
TelecomAsia, despite its massive $400 million foreign
currency-denominated debt. C.P. executives argue that much of this debt
is long-term. They also point out that, with TelecomAsia having installed
2.6 million lines in Bangkok, the prospects for income are good. "Every
additional line sold means 100% profit for the company," says a senior
C.P. executive in Bangkok. Still, C.P. hopes that Bell Atlantic, the
American telecoms giant that owns 17% of TelecomAsia, will increase its
Also preserved at the core are C.P.'s agribusinesses in Indonesia, China
and Thailand. Dhanin argues that recent investment in this sector will
enable the group to take advantage of better prices for exports that earn
income in dollars. In 1997, C.P.'s agribusiness operations generated
turnover of $7 billion from 12 countries--more than three-quarters of the
group's total turnover.
That's why some insiders feel that C.P. erred in China when it strayed
from its agribusiness core. Not only did the group borrow heavily to do
so, it also lacked the expertise to make the investment work quickly. "I
don't think it was smart," says a source familiar with the C.P. Group. "The
problem is management. They don't have capable people. Investment's
easy; management is difficult."
He says that some managers were chosen because of their connections
with the Chearavanont family, and not because of their managing
prowess. Linking up with foreign companies that had expertise in new
fields didn't always work because foreign managers had trouble
operating in China's alien environment. "You can't just buy in the
know-how. You need the corporate culture to go with it," says a foreign
executive who works closely with C.P.
Moreover, poorly executed investment strategies left C.P. more exposed
to debt than need be. Bruce Richardson, ABN Amro Hoare Govett Asia's
chief representative in Shanghai, says that C.P. was losing market share
for motorcycles produced at the Shanghai plant because it was slow to
implement production changes and adapt to the changing market. C.P.
executives admit they were fighting a losing battle against a flood of
smuggled imports from Japan.
On the property front, C.P. invested in malls and other commercial
buildings in Beijing, Tianjin, and Shanghai that are now stalled because
of oversupply, property consultants in China say. "As a business
person, if I run a mall in an environment where there are so many empty
malls, I would be getting cold feet," says one.
Most analysts say it will be hard for C.P. to sell these businesses
profitably. "No one will pay what C.P. thinks the market price is because
people are waiting for China's economy to fall off the edge," says a
foreign stockbroker in Shanghai.
More worryingly for the creditors, some of C.P.'s core activities in China
may also be running into problems. Take Shanghai Dajiang, China's
largest chicken-processing company, in which C.P. holds a 43% stake.
Shanghai Dajiang's profits are expected to fall this year because it is
cheaper for Japan, the company's big overseas market, to import
chicken-meat from Thailand since the baht's devaluation.
Despite C.P.'s self-proclaimed skills at doing business in China, it is also
having a difficult time in its dealings with local companies. In February
1997, for example, C.P. started a price war in animal feed with the
Sichuan-based Hope Group; it defeated smaller competitors, but did not
capture market share from Hope.
C.P. is very defensive about its China investments, admitting only that
the pace of growth will slow down. "It would not make any sense to talk
about expanding--we have to slow down and even halt expansion," says
Dhanin. Company executives insist that their strategy has worked in
China, and will work again. "We filled a gap and offered the most
competitive technology and capital to set up in China," says one
executive. "We still believe this is the only way to succeed in China."
For now though, Dhanin is hoping to contain the damage by building
firewalls between parts of his disparate empire, isolating businesses less
affected by the crisis. "Under the current situation, each of the
companies under the group in different countries affected by the
financial contagion will first of all have to help itself," he says.
The strategy points to a significant reduction of the group's reach and
ambition. Company executives talk about putting new overseas projects
on hold--although a third Lotus Superstore will open as planned in
Shanghai. Any new investment, they say, is likely to be closer to home in
Southeast Asia and very much focused on agribusiness.
Perhaps more important for C.P. is to preserve its home base in Thailand.
That's becoming harder with domestic interest rates running at around
20% and the Thai economy expected to contract more than 6% this year.
The threat has driven Dhanin to the prime minister's office to plead for a
lowering of interest rates. "Dhanin would like to see higher inflation, a
weaker baht but lower interest rates," says a senior economics minister.
But the old-fashioned nexus between corporate interests and the political
establishment may be harder to maintain in the wake of the International
Monetary Fund's stringent demands for transparency.
Despite these problems, analysts don't see C.P. being taken down by the
regional economic crisis. Optimists believe that the group, overextended
and debt-laden, will cut back to the core and learn from its mistakes. But
first it will have to get over its coming debt-rescheduling hurdles.