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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
                      core agribusinesses

     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
     survivalist strategy.

     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
     five-year term.

     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
     these businesses." 

     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.