Syntax Literate: Jurnal Ilmiah Indonesia p–ISSN:
2541-0849 e-ISSN: 2548-1398
Vol. 8, No. 12, December 2023
RECOVERING VALUE IN DISTRESSED COMPANIES: A CASE STUDY OF TUBAN
PETROCHEMICAL INDUSTRIES AND ITS SUBSIDIARIES
Hilman
Prakosa, Ruslan Prijadi
Faculty of Economics and Business, Universitas Indonesia, Indonesia
E-mail: [email protected], [email protected]
Abstract
This study
aims to investigate the restructuring process of PT Tuban Petrochemical
Industries (Tuban Petro) and its subsidiaries, formerly owned by the
ex-National Bank Restructuring Agency (IBRA). The study also seeks to examine
strategic initiatives aimed at increasing competitiveness and effecting
leadership, organizational, and stakeholder changes to achieve value recovery. This qualitative
study employs an explanatory case study approach. Data were collected through
unstructured interviews and archival studies. The market multiples approach was
used to measure the estimated stock value. The results indicate that the turnaround
strategies and efforts successfully unlocked value during the distressing
conditions. Strategies for restoring competitiveness, changing leadership and
organization, and gaining stakeholder support were crucial for achieving value
recovery. In distressed companies, shareholders, suppliers, distributors, and
creditors play a significant role in restoring competitiveness and driving
changes in leadership and organization. The estimated value recovery shows that
the turnaround was implemented through a strategy with costs and a long value
recovery time. This study fills a gap in the literature as few studies have examined the
restructuring of ex-IBRA assets due to limited access to comprehensive
information. The findings provide an alternative evaluation of the restructuring
process and the strategies implemented, which can inform future strategies for
similar distressed companies facing crises.
Keywords: Restructuring, Debt Restructuring,
Financial Distress, Strategic Management, Valuation, Petrochemical Industry
Introduction
Indonesia's economic crisis was triggered by the
Mexico crisis in 1994-1995 and compounded by the regional economic crisis in
Asia (Cho, 2003), which resulted from a currency exchange rate crisis against
the US dollar. Suta (2003) attributes the exchange rate crisis in Thailand,
Korea, and Indonesia to currency overvaluation and undervalued interest rates.
Berg (1999) notes in an International Monetary Fund (IMF) report that crises
are caused by fundamental deficiencies and financial panics, where declining
currency values negatively affect the real sector. Companies that have debts to
banks, investors, and suppliers with foreign currency denominations lose their
repayment capacity.
To stabilize the national banking industry, the
National Bank Restructuring Agency (IBRA) was established through Presidential
Decree No. 27/1998 as a special agency under the Minister of Finance, with a
limited operating period of five years. The program involves managing and
restructuring assets, grouping the company's debt based on business prospects,
the potential return on value, and the debtor's goodwill, as well as grouping
debt restructuring based on the one obligor concept.
This study focuses on PT Tuban Petrochemical
Industries (Tuban Petro), which was established in 2001 by the Indonesian
government to facilitate the debt restructuring process of the Tirtamas
Majutama Group (Tirtamas Group), one of the top ten obligors, which transferred
its receivables to IBRA. IBRA transferred all principal receivables and
guarantees to Tuban Petro and its subsidiaries engaged in the petrochemical
industry in return for guaranteed and secured bonds issued on February 27,
2004, when the restructuring process was completed.
The 1998 Crisis left distressed assets and
ex-IBRA debts that have not been repaid. Among the few assets that survived was
the Tuban Petro group, which has undergone a restructuring process since 2002.
This study analyzes the Multi Years Bond (MYB) with payment sources from Tuban
Petro's subsidiaries in the pre-turnaround phase. After regular MYB payments
until 2011, the 2008 global recession significantly impacted Tuban Petro's
subsidiaries, which ceased operating in 2012. This led to MYB failure and Tuban
Petro's repeated distress. The second Tuban Petro restructuring process was
carried out in 2012, with various strategic steps to conduct turnaround and
value recovery. The events presented in Figure 1 are important to explore how
the processes were conducted on ex-IBRA assets and provide valuable insights
for future restructuring schemes in the event of another crisis.
Figure 1 Key Events that motivated the study.
Based on the
problem formulation described, this study aimed to investigate the following
questions: 1) What was the restructuring process and pattern of PT Tuban
Petrochemical Industries from 2002 to 2019? 2) What strategies did the company
use to turn around and unlock its value? 3) How did the company's value develop
during the restructuring process, as measured by the comparable market approach
of EV/EBITDA multiples?
This case study
seeks to investigate the company's strategy during the challenging
restructuring period, focusing on the following aspects: 1) Analyzing the
pattern of debt restructuring carried out by PT Tuban Petrochemical Industries
between 2002 and 2019; 2) Examining the company's strategies for turnaround and
value creation; 3) Identifying the
increase in the company's value during the turnaround period.
Following Ross et
al. (2015), the financial distress of a company is the result of a capital
structure that includes a certain portion of loans. Companies with higher risk
of financial distress tend to borrow less, which is closely related to
liquidity, a determining factor of financial distress. Financial restructuring
is initiated when a company is unable to meet its loan or debt repayments
through operating cash flows, leading to default on the credit agreement made
(Altman, 2019). In this scenario, it becomes crucial for the company's management
to make corrections involving shareholders and creditors. According to Altman
(2019), the main objective of financial restructuring is to restructure the
assets, liabilities, and equity in the financial statement of the company.
The motivation for
financial restructuring is to maximize the company's value and reduce the
capital cost. Companies with expensive capital structures require financial
restructuring to reduce leverage to a more sustainable level in the long term.
As suggested by Ross et al. (2015), corrective actions include selling a
portion of the company's assets, merging with other companies, reducing capital
expenditures and R&D, issuing securities, negotiating with creditors,
exchanging debt for equity, and filing for bankruptcy.
Furthermore,
improvements after financial distress can be seen in changes in management and
governance (Wruck, 1990). Weak management and governance could cause financial
distress, and therefore, improving these areas can help in a company's recovery
or turnaround. Additionally, financial distress can impact an organization's
economic activities, including operating models, which forces management to
reformulate company strategy.
Altman (2019)
conducted a study on the bankruptcy of 40 companies, including Lyondell
Chemical Co. and Reliance Group Holdings Inc., which are petrochemical
companies. Lyondell Chemical Co. merged with Basell, a deal worth USD 19.4
billion, and is now known as Lyondell Basell, which is the largest producer of
polymers, petrochemicals, and fuel worldwide and a leading player in polyolefin
technology licensor (Borhan et al., 2014). Reliance Group Holding Inc. and
Lyondell Chemical Co. went bankrupt on June 12, 2001, and January 6, 2009, with
a debt of USD 17.8 billion and USD 20 billion, respectively. Although the
bankruptcies occurred after the economic crisis, the two companies have
successfully turned around.
The success of debt
restructuring and turnaround strategies has been a widely discussed topic in
the energy and petrochemical industries. O'Neill (1986) conducted a study on
large companies in America in 1986, which showed that the success of
restructuring is influenced by factors such as competitive position, product
life cycle, industry, organization and management processes, and decline cause.
Organizational change and effective management are crucial for a company's
turnaround success.
Kazozcu (2011)
found a link between global and regional economic recession conditions and
increased business failure during a crisis. The study also found that a
company's turnaround is related to the loss of competitive advantage, the
threat of existence, and how to regain competitive advantage subsequently. Mann
and Byun (2017) conducted a study on savings and investments in response to the
great 2008-2011 recession in the United States.
They categorized
the investment into market expansion, product and service development,
strategic partnership, and corporate social responsibility. Nishihara and
Shibata (2016) stated that a turnaround requires companies to sell assets,
obtain lower financing, and renegotiate debt without liquidation. Asset sales
could reduce debt to obtain an optimal capital structure.
Rico and Puig
(2019) analyzed 868 sample companies in Spain from 2004 to 2017 and found that
stakeholder support, cost efficiency, and retrenchment were the most
influential factors in survival and recovery probability. The study also showed
that savings should not be the only tool, but distressed companies should
restore stakeholder relationships while selling assets, and their evaluation
should be carefully considered when making a turnaround.
Therefore,
promoting a successful turnaround in the petrochemical sector involves
restoring competitive advantage in investment, cost efficiencies, strategic
partnerships, stakeholder support, as well as organizational and leadership
changes (Altman, 2019; Borhan et al., 2014; Kazozcu, 2011; Mann and Byun, 2017;
Nishihara and Shibata, 2016; O'Neill, 1986; Rico and Puig, 2019).
Damodaran
identified three approaches to valuation (Damodaran, 2012). The first is the
discounted cash flow valuation, which relates to the asset value and the
expected future cash flows. The second is relative valuation, regarding
estimating the value of assets by looking at the pricing of comparable assets
relative to general variables such as cashflows or the book value. The third is
to use option pricing models. (Damodaran, 2012) found that mature companies
with a long history could be compared with some current and past transactions.
Moreover, (DePamphilis, 2005) stated that EBITDA is a popular measurement for
valuing private firms.
This measurement
compares several companies and eliminates distortions in net performance
regarding differences in depreciation and financial leverage. The approach is
also used in the comparative valuation method, which measures profitability. In
relative valuation, the asset value is obtained from the price of comparable
assets, such as earnings, cashflows, book value, or revenue, using the
industry-average price-earnings ratio to a company’s value. This assumes that
other companies in the same industry are comparable to the company being
assessed and that the market averages the correct value.
Another multiple
used is the price to book value, where the company sells the book value at a
discount. Multiple prices for sales could also be used. The enterprise value to
EBITDA multiples is widely used through role price to cash flow. (Damodaran,
2012) stated that Multiple is often used for capital-intensive companies with
heavy infrastructure investments. The multiple methods are suitable for use in
the petrochemical industry, according to the study object. Besides EV/EBITDA,
revenue multiples are used as the basis. (Damodaran, 2012) showed that a more
popular price-to-sales ratio increases the multiples of the equity market value
on the company's income.
The second and
stronger ratio is a multiple of the company's value, including debt and equity
to revenue, called the enterprise value to sales ratio. (Damodaran, 2012)
explained the assessment of holding companies by considering the broader
category of non-operating assets. The assessment begins by examining the
various accounting treatments of different ownership and how they affect
reporting in financial statements.
The equity in each
ownership is assessed separately, and the value of proportional ownership will
be estimated at the parent company's equity value. Therefore, this study
assessed the equity to the value of a company with minority ownership in the
other three companies. It took the percentage share of equity in each company
and added it to the equity value in the parent company. The consolidated income
statement should remove the subsidiary's income, assets, and liabilities from
the parent company's finances to avoid doubling the subsidiary's value.
Research Methods
This qualitative
study employs the Explanatory Case Study approach (De Massis and Kotlar, 2014)
to gain an in-depth understanding of why a particular phenomenon occurs.
According to Creswell (2018), a case study is a valuable strategy for exploring
programs, events, activities, processes, and individuals in depth. The
selection of cases is determined by a focus on analyzing a single object, and
De Massis and Kotlar (2014) recommend conducting multiple case studies within
one organization instead of analyzing multiple case studies of different
organizations. Data were collected using triangulation and interviews with
actors and experts to obtain confirmation and validity from independent parties
based on related theories.
In this case study,
unstructured interviews, or in-depth interviews, as described by Yin (2018),
will be predominantly used. In addition to confirming the interpretation of
results from the archival study, these interviews will provide deeper insights
to the researchers regarding the research problem. The interviewees will
include representatives from TubanPetro management, senior members/managers
from the former national bank restructuring agency (BPPN), and officials from
the Ministry of Finance or PT Perusahaan Pengelola Aset (Persero) who were in
leadership positions during the research period.
A
framework was developed based on previous studies to maintain focus. Schoenberg
et al. (2013) identified historically effective turnaround and recovery
strategies, which include cost efficiencies, asset retrenchment, focus on the
firm's core activities and building for the future, as well as the
reinvigoration of the firm's leadership and culture changes.
Additionally,
other studies, such as Rico and Puig (2019), Kazozcu (2011), Mann and Byun
(2017), and theories from Rothaermel (2017) and Altman (2019) were consulted.
Competitive advantage restoration, comprising investment activities, cost
efficiencies, strategic partnerships, stakeholder support, as well as
organizational and leadership changes, are the key factors driving a successful
turnaround. Several main focuses were determined and described in Figure 2
based on this compilation.
Figure 2 Initial Study Framework
The
following is an explanation of the study framework: 1) The study investigates how the pattern
and scheme of debt restructuring are implemented to ensure the company is not
burdened with unsustainable debt repayment obligations. This step answers the
first study question. 2) The study investigates the process of turnaround and value recovery,
including strategic initiatives to increase competitiveness, organizational and
leadership changes, as well as stakeholder support. This phase answers the
second study question. 3) The study calculates the estimated share value using a market-comparable
approach to obtain information on the value recovery from Tuban Petro.
Table
1 provides a detailed explanation of the data processing stages through the
phase division explored using archival studies and interviews assembled and
concluded.
Table 1. Data Processing Based on Study Stage Division
|
No |
Study Stage |
Scope of Study Questions |
Data Collection |
Expected Output |
|
1 |
Debt Restructuring |
Q1 |
Archival Study •
Related agreements •
Terms sheets •
Financial statements •
Other documents Interview •
Unstructured Interview with IBRA and PPA. |
·
Restructuring Instruments ·
Guarantee Structure ·
Special Purpose Vehicle as a
restructuring transaction deal structure ·
Situations that lead to default ·
Consequences of default and
structural changes |
|
2 |
Turnaround Strategy and
Process |
Q2 |
Archival Study •
Financial
statements •
Business
Plan (RJPP) •
Agreements
and other documentation Interview •
Unstructured Interview with IBRA and PPA |
·
Identified strategic
initiatives in debt settlement ·
The role of efforts to
return/increase competitiveness ·
The role of leadership and
organizational change ·
The role of stakeholder
support |
|
3 |
Company Value Growth |
Q3 |
Archival Study •
Financial statements •
Business Plan •
Industry Data |
·
Equity Value (Estimated)
during the turnaround period |
This
study also identified comparison companies to set valuation multiples according
to the same field to answer the third question. Data on comparison companies
were collected to calculate Tuban Petro’s shares using the market multiples
method. According to Damodaran (2012), the equity in each ownership is assessed
separately in distressed holding companies. The study estimated the
proportional ownership value added to the equity value of the parent company.
Results and Discussion
Object
This study focuses on PT Tuban Petrochemical Industries (Tuban Petro) and
its subsidiaries, namely PT Trans-Pacific Petrochemical Indotama (TPPI), PT
Petro Oxo Nusantara (PON), and PT Polytama Propindo (PP), which are involved in
restructuring and turnaround processes. TPN is excluded from the study. Tuban
Petro, as a holding company, manages its subsidiaries' activities.
TPPI was established in 1995 with an original design capacity of producing
3.6 million MT per year of aromatics and refined products. In April 2006, TPPI
began producing its first aromatic products after previously operating as an
oil and petroleum products facility. However, in May 2009, the plant complex
restarted a new operation with government-owned condensates. PON, established
in 1995, is a pioneer in the 2EH (2-Ethyl Hexanol), Normal Butanol (NBA), and
Iso Butanol (IBA) industry in South East Asia. The original nameplate capacity
of PON was 115,000 MT per year of 2-EH production, but the facility was
revamped to increase the total plant capacity to 135,000 MT per year of 2-EH in
early 2008. PP, established in 1993, is a significant manufacturer of
polypropylene in Indonesia, taking a leading role in responding to the rapid
increase in demand for polypropylene. Currently, PP's capacity is 300,000 MT
polypropylene per annum.
In terms of the study framework, Tuban Petro is the object in the Debt
Restructuring stage. TPPI, PON, and PP are also investigated to determine their
involvement in restructuring schemes. The second stage, the Turnaround Process,
focuses on Tuban Petro and its subsidiaries, including TPPI, PON, and PP.
Finally, in the third stage, the equity value estimation of Tuban Petro and its
subsidiaries, including TPPI, PON, and PP, is calculated. As a holding company
with no operations besides management activities, the value of Tuban Petro is
contributed by the investment value of its subsidiaries' shares, which are
estimated and combined into the value of Tuban Petro as the parent.
Debt Restructuring of PT Tuban Petrochemical Industries
A company's financial distress often leads to restructuring, which is
necessary when operating cash flows cannot meet loan or debt repayments
(Altman, 2019). This triggers a default on credit agreements, requiring
corrective measures by management involving shareholders and creditors. This
study examines the restructuring pattern of Tuban Petro, which resulted from
the Tirtamas Group restructuring carried out by IBRA. Poor operating
performance and high financial leverage due to exposure to loans in foreign
currencies caused the restructuring (Altman, 2019; Jiang et al., 2019).
To overcome financial distress conditions, troubled companies need to
recover effectively and avoid entering the liquidation process. Therefore, IBRA
implemented a structure stipulating that the debts of the Tirtamas Group to
IBRA would be transferred to a holding company along with the attached
guarantees. The Tirtamas Group would owe the debt to a new company in place of
IBRA. The new company would issue a bond to IBRA for the amount of the
transferred receivables. The founding shareholders would still be responsible
for the obligations of the founding shareholders and would arise in the future
from the companies that would become assets. This ensures that all cash flows
are pooled together, and debtor companies become more optimal under the new
company (Jiang et al., 2019).
A new company, PT Tuban Petrochemical Industries, also known as Tuban
Petro, was established in March 2001. The shares of Tuban Petro are 70% owned
by the Government/IBRA, and the remaining 30% belong to the Tirtamas Group.
This 70% share ownership ensures that all obligations are paid in full. The
purpose of managing it is not owned and developed by the Minister of Finance
but for monetization or recovery (Informant 1, 2022). All the debts were
collected and discussed with Tirtamas. It was agreed that the debts accrued by
forming a new company, Tuban Petro, as a substitute for the indebted companies
in Tirtamas (Informant 3, 2022).
The formation and restructuring schemes of Tuban Petro are illustrated in
Figure 3. All companies belonging to the Tirtamas group engaged in the
petrochemical sector were acquired by Tuban Petro. TPPI refinery is not
operational, with a completion status of 40%, whereas Polytama (PP) is in
commercial operation. PON operates but has not completed restructuring with
foreign creditors, and Pacific Fibretama (PF) is not operational, with a
completion status of 85%. It has not finished restructuring with foreign
creditors. The companies are expected to be the source of repayment for the
acquisition, meaning they are in a distress acquisition (Iwasaki et al., 2021).
Figure 3. Tirtamas
Majutama Group Restructuring Scheme
Acquirers face challenges and opportunities to determine the crucial
points and valuable insights, the source of repayment, and the return of value
from shareholders. Debt repayment sources to IBRA with the acquired companies
are restructured with MYB. The amount of MYB mirrors the total liabilities of
the Tirtamas Group, which is IDR 3,2 trillion. The bonds are divided into ten
series with different maturities of 10 years and a coupon of 1% per year. The
rescheduling and interest reduction allow Tuban Petro to revitalize its
business and regain competitiveness to pay its obligations to IBRA/Government.
The findings of this restructuring scheme suggest the occurrence of
repeated distress conditions. In 2012, Tuban Petro failed to pay MYB to the
Government/Minister of Finance, which PT Perusahaan Pengelola Aset (Persero)
(PPA) managed after dissolving IBRA. This study identifies several critical
issues contributing to repeated distress conditions. The subsidiaries of Tuban
Petro face challenges paying dividends to Tuban Petro regularly, owing to
over-leveraged general conditions, negative retained earnings, operational
problems, and delays in acquisitions because of the free and clear status to be
achieved.
The main problem in this restructuring was that TPPI had stopped
operating due to operational problems, including liquidity difficulties,
unfavorable macro conditions, and working capital difficulties, and threats
from creditors, particularly Pertamina. Problems in PP also led to a lack of
MYB payment distribution, particularly the availability of working capital and
raw materials. The global crude oil price crisis significantly increased the
price of raw materials and decreased product prices, causing PP to suffer
losses. PP's receivables at TPPI in working capital assistance have also not
been paid due to financial problems. Consequently, PP is experiencing serious
cash flow difficulties, as explained by the informants in Table 2.
Table 2. Summary of Findings Related to
the Tuban Petro Restructuring
|
Phenomena Description |
Key Issues/Challenges |
|
|
Debt
Restructuring |
•
Formation
of Holding Company •
Issuance
of New Debt Instruments (restructured) •
•
Acquisition of share assets by the holding company as a source of remaining debt
repayment. TPPI and PP were acquired first, and PON and PF followed. •
Rescheduling
payments and reducing interest |
•
TPPI,
which is expected to provide the largest cash flow, still requires additional
investment for plant completion •
PF
failed to be acquired because it could not reach a restructuring agreement
with foreign creditors other than domestic bank creditors whose receivables
were transferred to IBRA. •
Overleveraged
and cash flow problems lead to default of the bonds. |
The findings of this study suggest that the restructuring scheme has the
potential for deviations in its implementation to cause distress. The
subsequent restructuring occurred in 2018 when MYB debt was converted into
shares due to resulting issues and challenges. Nishihara (2016) stated that a
company conducts a turnaround by selling assets, asking for lower financing,
renegotiating debt, and choosing restructuring rather than liquidation. In
2018, the Head of Agreement was signed between Pertamina and the Ministry of
Finance, where Tuban Petro planned to take corporate actions to resolve the MYB
problem.
Tuban Petro and its subsidiaries were expected to develop their business
and become an investment platform for the national petrochemical industry. The
MYB settlement involved converting the debt principal and rescheduling the
payment of interest costs and penalties. This option would convert the
principal debt of IDR 2.62 trillion into share investments. The remaining
portion of the payment would be rescheduled with a maximum period of ten years
appropriate to the provisions.
Completing the MYB conversion significantly impacts the company,
including additional cash flow reserves, reputation improvement, and
opportunities for business development. The direct impact on Tuban Petro from
the MYB conversion is reduced financial obligations, and increasing cash flow
for use in operational and expansion activities. The reduced obligations would
also improve the company's financial reputation. The MYB conversion would
increase the solvency ratio, which has been poor due to the large MYB value and
is not comparable to Tuban Petro's assets. Therefore, the financial condition
would look healthier and bankable, allowing Tuban Petro to apply for loans to
finance development activities.
The MYB conversion also has a positive impact on the government's
shareholding in Tuban Petro. The government's shareholding in TPI would be
maintained, and the share ownership would increase with the portion of MYB
liabilities converted into shares. Therefore, the government would still have
control as a shareholder in decision-making aspects. TPI needs a growth
initiative to increase its financial capacity to make payments for the
unconverted portion and independently meet operational costs. This initiative
is expected to increase the value of the Tuban Petro subsidiary in the future.
Tuban Petro Turnaround Process
In a study conducted by Schoenberg et al. (2013), effective turnaround
and recovery strategies were identified. The success factors promoting
successful turnaround were also discussed in theories by Rico and Puig (2019),
Kazozcu (2011), Mann and Byun (2017), Rothaermel (2017), and Altman (2019).
These factors include returning competitive advantage in investment activities,
cost efficiencies, strategic partnerships, stakeholder support, and
organizational and leadership changes. This study investigates and discusses
the roles of these factors in the restructuring of Tuban Petro, as follows:
1. Strategic initiatives to restore competitiveness refer to Tuban Petro
management's implementation of initiatives to revitalize its business. Such
initiatives could involve changes in business models, investment activities
such as new product development, increased production capacity, strategic
cooperation or alliances, and others with a competitive objective. Schoenberg
(2013) described this factor as a focus on the firm's core activities and
building for the future.
2. Organizational and leadership changes are essential factors in
successful turnaround strategies. Studies have shown that changes in the
leadership of the Board of Directors, Commissioners, and organizational
structure are very effective strategies.
3. Stakeholder support includes the Indonesia Minister of Finance, PT PPA
as the Tuban Petro manager, PT Pertamina (Persero) as the main supplier, and a
TPPI shareholder, a Tuban Petro subsidiary. Others are customers as
distributors of petrochemical products, exporters, agents, end-users, and the
Government.
The roles of these turnaround success factors were observed during the
restructuring process of Tuban Petro. The company completed the process during
the turnaround period following the default in 2012 due to cash flow
distribution issues, challenges, and overleveraged conditions. The summary of
the phenomena is presented in Table 3.
Table 3 Summary of Findings in Tuban Petro
Turnaround Strategy
|
Key
Focus Area |
Description |
Role |
|
Strategic Initiatives to Recover
Competitiveness |
•
TPPI
operation through a tolling scheme by Pertamina •
Reoperation
of PP with tolling schemes and cash advance support through strategic
alliances with major distributors. •
Increasing
PP's capacity to increase economies of scale accelerates dividend payments
through improved retained earnings. |
•
As a
critical factor in avoiding idle operations and generating the cash flow
needed to repay debt. Moreover, this factor increases profitability during
the turnaround period. |
|
Leadership and Organization Changes |
•
Changes
in leadership through the placement of government representatives |
•
The leadership factor has a role in
giving better control to Tuban Petro as well as carrying out business
transformation and revitalization. |
|
Stakeholders Support |
•
The
government as the ultimate shareholder increases the trust of suppliers,
customers, and other creditors in the group. •
Pertamina's
support as a supplier in the re-operation of TPPI through a tolling scheme
and re-supplying to PP. •
The
government's commitment as a shareholder and creditor in implementing
debt-to-share conversion to support further development |
•
Support
from stakeholders is an important factor and a lever for other factors
analyzed in this case study. |
Overleveraged condition is the main challenge encountered when conducting
a turnaround. Ross et al. (2015) stated that a company's financial distress
results from a capital structure with a certain level of loan portion, which
impacts insufficient working capital and difficulties in carrying out
initiatives. Wruck (1990) suggested that the turnaround strategy that financial
distress conditions promotes strategy re-formulation, which has been
implemented by Tuban Petro.
However, the challenge lies in the implementation stage. When conducting
a turnaround in overleveraged conditions, support from stakeholders is needed
to leverage the success of initiatives. This includes the replacement of
leadership overseeing the implementation of the turnaround strategy. The
findings are summarized in Figure 4.
Figure 4 Summary Chart of
the Restructuring Phenomenon and Turnaround Strategy
The study compares its findings with those of Schoenberg et al. (2013) on
effective turnaround and recovery strategies. Other relevant studies and
theories from Rico and Puig (2019), Kazozcu (2011), Mann and Byun (2017),
Rothaermel (2017), and Altman (2019) show that successful turnaround is
encouraged by factors such as returning competitive advantage in investment
activities, cost efficiencies, strategic partnerships, stakeholder support, as
well as organizational and leadership changes.
These factors are crucial in the turnaround process of Tuban Petro and
its subsidiaries. The study also finds that stakeholder support is a lever factor
for competitiveness recovery and leadership and organizational changes. Tuban
Petro's equity value is estimated to understand how its value moves in the
turnaround process.
Therefore, the competitiveness recovery, leadership changes, and
stakeholder support have implications for EBITDA recovery in Tuban Petro's
subsidiaries as follows:
1) TPPI reoperation through a tolling scheme with Pertamina is a
strategic initiative to restore competitiveness and stabilize EBITDA during the
turnaround period. Pertamina's role as a supplier and shareholder makes it the
best support in the turnaround process. TPPI's EBITDA grew by 28% CAGR in the
last four years.
2) PP reoperation with a tolling scheme followed by an increase in
production capacity provides recovery and a significant increase in EBITDA. In
the last four years of the turnaround period, EBITDA increased by a CAGR of
68%.
3) PON experienced a decline in EBITDA due to the trade war between the
United States and China, which reduced demand in China. As a result, 80% of PON
sales were exported to China. Good management placement and better PON leverage
capacity made the decline in EBITDA in 2019 not disrupt the company's
operations.
The decrease in PON EBITDA was compensated by the increase in TPPI and PP
EBITDA, which still contributed positively to the level of Tuban Petro as a
holding. The chart indicates that further observations related to each factor
could still be deepened to suggest further analyses. Additionally, studies on
the company's post-turnaround strategy could determine the next phenomenon
after the turnaround period.
Company Value Development
This study aims to calculate the estimated equity value of Tuban Petro to
assess the development of the company's value and recovery time during the turnaround
phase. The multiples relative valuation method using 11 comparison companies in
the petrochemicals industry in Asia was employed to determine the equity value
from 2012 to 2019. The comparison companies used to determine equity value are
shown in Table 4.
Table 4 List of Comparable Companies
(Comparables)
|
Company |
Bloomberg Ticker |
Main Business |
|
Indonesia |
|
|
|
PT Chandra Asri Petrochemical Tbk |
TPIA/R: IJ |
Petrochemicals |
|
Korea |
||
|
Lotte Chemical |
011170 KS EQUITY |
Petrochemicals |
|
LG Chem |
051910 KS EQUITY |
Petrochemicals |
|
Korea Petrochem |
006650 KS EQUITY |
Petrochemicals |
|
Kumho Petrochem |
011780 KS EQUITY |
Petrochemicals |
|
Taiwan |
||
|
Formosa Chemicals & Fibre |
1326 TT EQUITY |
Petrochemicals |
|
Nan Ya Plastics |
1303 TT EQUITY |
Petrochemicals |
|
Formosa Petrochemical |
6505 TT EQUITY |
Petrochemicals |
|
Formosa Plastics |
1301 TT EQUITY |
Petrochemicals |
|
Thailand |
||
|
PTT Global Chem |
PTTGC TB EQUITY |
Petrochemicals |
|
Malaysia |
||
|
Petronas Chemicals Group Bhd |
PHECM MK EQUITY |
Petrochemicals |
The equity value for 2012 to 2019 was calculated based on the data from
each comparison company. Figure 5 presents the mean EV/EBITDA for 2012 – 2019,
which was calculated each year for the 11 companies. Using the mean EV/EBITDA,
the equity value of the three subsidiaries of PT Tuban Petrochemical Industries
(Tuban Petro) - TPPI, PP, and PON - was calculated. In determining equity
value, enterprise value was obtained by multiplying the EBITDA of each
subsidiary by the mean EV/EBITDA of the industry or comparable company.
Figure 5. Industry Mean
EV/EBITDA 2001-2019
In the event of a negative EBITDA for a subsidiary, the enterprise value
was labeled N/A. To anticipate a negative N/A or EBITDA enterprise value, an
alternative calculation was conducted using EV/Revenue on the N/A enterprise
value. This involved multiplying the mean EV/Revenue with the revenue earned
that year. Additionally, a 30% Discount on Lack of Marketability (DLOM) and a
30% Discount on Lack of Control (DLOC) for ownership under 20% (TPPI in
2014-2019) was applied in calculating the equity value for each subsidiary.
The EBITDA and mean EV/EBITDA values were used to determine the
enterprise value of the three companies. Enterprise Value was calculated by
multiplying the EBITDA of each company by the industry mean EV/EBITDA.
Furthermore, the equity value was calculated by subtracting the enterprise
values from the debt values to obtain the share value of the three
subsidiaries. Tuban Petro's share ownership in TPPI, PP, and PON are as follows:
1) TPPI: from 2001 to 2013, it was 59.5%; from 2014 to 2018, by 19.16%; and in
2019, by 48%. 2) PP: from 2001 to 2019, 80%. 3) PON: 2001 to 2019 by 50%.
A 30% Discount on Lack of Marketability (DLOM) and a 30% Discount on Lack
of Control (DLOC) were applied for ownership below 20% (TPPI in 2014 -2018).
The Net Equity Value of TPPI, PP, and PON was then added. Additionally, the
outstanding MYB value owned by Tuban Petro from the initial issuance until 2019
was subtracted from the net equity value of Tuban Petro, and the cash value of
Tuban Petro was added. The largest Net Equity Value result of IDR 7.1 trillion
was obtained in 2019.
Figure 6 illustrates the estimated annual equity value of Tuban Petro
from the turnaround phase until 2019. The estimated equity value shows that
recovery from a turnaround process cannot be achieved instantly. The increase
in value was contributed by the increase in EBITDA of all subsidiaries, where
turnaround efforts were made for the last seven years. All efforts to implement
a turnaround strategy were the main drivers of increasing EBITDA, which
contributed to the recovery in estimated firm value using market multiple
methods.
Figure 6 Graph of
Subsidiaries' Total Equity Value (in Billion IDR)
Conclusion
The
study found that after the initial restructuring, Tuban Petro still faced
serious challenges of insufficient cash flow for payments and overleveraged
capital structure conditions. This led to repeated distress conditions, marked
by the failure to pay MYB to the government. However, the company conducted a
turnaround after the distress condition, which focused on restoring
competitiveness, leadership and organizational change, and stakeholder support
as a lever factor. The role of shareholders, suppliers, distributors, and
creditors supported the restoration of competitiveness and changes in
leadership and organization.
The
study also found that the estimated value recovery showed that the turnaround
had been successfully implemented by a strategy with costs and a long value
recovery time. It took seven years for Tuban Petro to recover and reach IDR 7.1
trillion, exceeding the pre-distress value. The study highlights that economic
crises and changes in dynamic market conditions are beyond the company's
control. However, capital structure management and optimal calculation of
sustainable debt composition make companies more sustainable and resilient to
these conditions. A turnaround to restore company value requires stakeholder
support, leadership changes, and restoration of competitiveness.
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Copyright holder: Hilman Prakosa,
Ruslan Prijadi (2022) |
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First publication right: Syntax Literate: Jurnal Ilmiah Indonesia |
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