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Bakrie vs Rothschild

Bumi Resources (BUMI) continued to drop lately, but that does not make it less attractive in the eyes of most of the traders and investors. In fact, some investors are actually started to take a look at this stock, with their own reasons. On the other hand, those who hold BUMI from its upper price are still confused to make choices that are equally difficult: Do I have to hold it still, or just sell it off, which it was meant to realize the potential losses?

BUMI recorded revenues of US$ 1.95 billion in First Half 2012 (1H12), up 8.6% from US$ 1.79 billion in 1H11. However, like other coal companies, BUMI recorded a higher increase in its costs, so the operating profit was down from US$ 461 to 239 million. At this point, the numbers are still normal. But as the company suffered losses due to derivative transactions, foreign exchange, and the divestments in associated companies, then BUMI eventually recorded a minus profit, namely comprehensive net loss of US$ 327 million. It's interesting, because in its cash flows, BUMI recorded US$ 144 million of net cash gain from its operating activities, grew nearly three-fold from US$ 53 million in the same period of previous year.

But perhaps, there is something that is more interesting to note about this giant coal company, rather than its performance.

You may remember the notable corporate action undertaken by Bakrie Group as the owner of BUMI, with their new partners from England,Nathaniel Rothschild, the owner of an investment company listed on the London Stock Exchange, Vallar Plc. Vallar took over 29.2% stake in BUMI and 85% stake in Berau Coal Energy (BRAU). As the compensation, the Bakrie Group became one of the major shareholders in Vallar Plc, with ownership of 47.6%. Vallar itself then changed its name to Bumi Plc. The transaction is fully completed in April 2011, and Nathaniel became one of the key shareholders in BUMI and BRAU.

Some time later, it looks like Nathaniel started to find ‘unusual things’ in the financial activities undertaken by BUMI’s management. And on 8 November 2011, Nathaniel finally wrote a letter to Ari Hudaya (Saptari Hoedaja), President Director of BUMI. In the letter, Nathaniel explicitly demanded an explanation from Mr. Ari about four of the following:

1. A clear schedule relating to monetization of the assets of the business development.
2. Repatriation of funds which placed on related parties, ie Recapital, Bukit Mutiara, and Chateau Asean Fund I.
3. A written explanation about the progress of the action no. 2
4. A more detailed and transparent about 'non-coal transactions’ which carried out by BUMI and BRAU.

Nathaniel wrote the letter after knowing that BUMI had account of ‘investments and other assets’ on its balance sheet, of US$ 867 million, of which the account is not related to coal and metals business of BUMI, but related party receivables, in this case from Recapital, Bukit Mutiara, and Chateau Asean Fund I, and the assets of business development assets that is 'not clear'. According to Nathaniel, the US$ 867 million assets should be monetized to be used to pay the debt to China Investment Corporation (CIC). Thus, BUMI can save loan interest expense of US$ 104 million per annum. Earlier in 2009, BUMI was obtaining a loan of US$ 1.9 billion from CIC, and loan contains very high interest rate, which is 19% overall. BUMI has had pay some of the debt in 2011, namely US$ 600 million, but Nathaniel considers that BUMI should have sufficient assets to pay off the debt.

Nathaniel wrote in his letter, 'I want to see you initiate a radical cleaning up of BUMI's balance sheet. I want an immediate transformation of the way you are choosing to manage BUMI.'

There is no information about whether the BUMI’s management BUMI replied or not to the letter, but Nathaniel is certainly uncomfortable with the investment management policy by the management. Mr. Ari himself was seemed to assume that he does not need too hear Nathaniel’ complaints, as Nathaniel was not the majority shareholder of the BUMI, but only 29.2%.

Only two months later, in late December 2011, the Bakrie Group sold a half of its ownership in Bumi Plc, to Borneo Lumbung Energi & Metal (BORN), at US$ 1 billion, so then the Bakrie Group and BORN holds 23.8% stake in BUMI Plc respectively. Bakrie itself used some of the US$ 1 billion cash they gained to pay some of its debts that would mature in 2012.

Because BORN later became one of the major shareholders in Bumi Plc, the owner of BORN, Samin Tan, then appointed as the chairman of Bumi Plc, replaces Indra Bakrie, who later became co-chairman. Nathaniel himself, who previously occupied the position of co-chairman in Bumi Plc, then 'demoted' to be a non-executive director.

Well now, if you were Nathaniel Rothschild, what would you feel after getting fooled two times in a row like that?

Until today, there are no further story about the friendship between Bakrie and Nathaniel. Nathaniel himself in an interview with FT.com says that his relationship with the Bakrie’s was still fine. But what's interesting is, after completing the share swap transaction of Vallar with BUMI and BRAU, Nathaniel founded another investment company, this time with the name Vallares Plc, with an interest in the field of oil and gas. The company was subsequently listed on the London Stock Exchange, and in September 2011 changed its name to Genel Energy Plc.

If traced back, Nathaniel founded Vallar Plc as an investment vehicle that used to acquire other companies, in this case the coal and metal ores companies. In this new company, Nathaniel recruited James Campbell, a former CEO of Anglo American Plc, a British coal company, as a partner. There is no information about what date Vallar Plc was established, but it was listing on the London Stock Exchange in July 2010, with an IPO value of US$ 1.1 billion. It was a very high IPO value, considering that Vallar Plc did not have assets.

A few months after its IPO, precisely in November 2011, Vallar announced that it will acquire interests in two coal companies from Indonesia, namely BUMI and BRAU (and also Bumi Resources Minerals/BRMS as the subsidiary of Bumi), with a total acquisition value of US$ 3 billion. Vallar would pay part of the cost of the acquisition in cash, using proceeds from its IPO, and also by changing 47.6% of its shares. In this way then Vallar became have assets, ie 29.2% stake in BUMI and 85% stake in BRAU. On the other hand, 47.6% stake of Vallar Plc then belonged to the Bakrie Group, so Vallar later changed its name to Bumi Plc. However, Nathaniel was still holds a stake in Bumi Plc.

So, if Mr. Hary Tanoesoedibjo could extraordinarily reap Rp2.1 trillion from the IPO of MNC Sky Vision (MSKY), which was already listed on the stock exchange through its parent company, Global Mediacom (BMTR), so that it can be said that Mr. Hary was making Rp2.1 trillion out from nothing, then Nathaniel Rothschild was even greater: He could making US$ 3 billion or around Rp27 trillion in the form of equity stakes in BUMI and BRAU, almost without spending a penny!

The stock swap transaction between Vallar and BUMI (and BRAU), as mentioned above, was completed in April 2011. Only two months later, in June 2011, Nathaniel held another IPO for his another company, namely Vallares Plc, to the London Stock Exchange, with an even crazier IPO value, ie US$ 2.2 billion. Vallares, like Vallar, initially had no assets. The difference, Vallar was used to enter the coal sector, while Vallares used to enter the oil and gas sector. In Vallares, Nathaniel recruit Tony Hayward, the former CEO of BP Plc, an British oil major company, as a partner. In September 2011, Vallares did stock swap with a Turkish oil company, Genel Energy, and Vallares immediately renamed to Genel Energy Plc, with Tony Hayward became its CEO. The transaction model between Vallares and Genel Energy can be said 99% identical to the transaction between  Vallar and BUMI and BRAU.

However, if Vallares was successfully held a 50% stake in Genel, Vallar was only managed to hold 29.2% stake BUMI. I don’t know, but probably the Bakrie Group was well aware that Vallar could not become a major shareholder in the BUMI (more than 40%). Because if that so, then Bakrie could lost BUMI entirely into the hands of Nathaniel. Maybe that's why Bakrie eventually included the BRAU into their transaction with Rothschild, where Nathaniel then acquired 85% stake of BRAU. We can say, it's okay to losing BRAU, as long as BUMI remains in the hands. BRAU itself, although not owned by the Bakrie Group but by Recapital, but Recapital obtain funds to acquire BRAU from Bakrie, so the actual owner of BRAU is Bakrie through Recapital.

But, just because now Vallar holds 29.2% stake in BUMI and 85% stake in BRAU, it doesn’t meant that Nathaniel holds BUMI and BRAU that much, isn’t it? Because Vallar itself, which is now called Bumi Plc, a part of its stocks is owned by Bakrie and Samin Tan, so Bakrie (and Mr. Samin) remains two of the major holders of the 29.2% stake in BUMI and 85% stake in BRAU, through Bumi Plc. Yup, that's right, but do not forget that Bakrie and Samin Tan were only hold a total of 47.6% stake in Bumi Plc, and the rest is not clearly known held by whom. Nathaniel himself does not itemize what percent its stake in Bumi Plc, some say 11%, but I think it could be more than that. The point is, Nathaniel through Bumi Plc is managed to be one of the substantial shareholders in the BUMI, something that has never been able to be done by others (BUMI stocks is once owned by Credit Suisse, its creditor, but the bank may not hold an asset like stocks for a long time, so it must be sold off. This is different with Vallar/Bumi Plc, which is not a bank), and it could be a gateway for Nathaniel to get in deeper. We can say, for now the most important thing is to be inside first.

But then why Bakrie Group would swap their stake in BUMI to Vallar, if it could make BUMI divested completely into the hands of Nathaniel? I don’t know, but maybe the Bakrie Group saw advantages if they could listing on the London Stock Exchange through Vallar. On the other hand, it is possible that Bakrie approved Nathaniel to get into the BUMI by forced, given that Nathaniel as a member of The Rothschild Family had enough power to do that (pushed Bakrie to sell some stocks of BUMI). But the Bakrie Group is also not a ordinary business group, so they are not that easy to sell BUMI off, even to the Rothschild. Probably that’s why in this case, the Bakrie Group was eventually asked for 'help' to Samin Tan.

So, it looks like we're watching a super-rich-foreign entrepreneur, who is trying to take over one of the most valuable assets of one of the wealthiest business group in Indonesia. Related to letter written by Nathaniel to Ari Hudaya, as we have seen above, it looks like it's just a distraction, or to gave an impression that Nathaniel was could easily bullied by the Bakrie. And related to subsequent events, ie the declining position of Nathaniel in Bumi Plc, from previously co-chairman to non-executive director only, it emphasized the 'helplessness' of Nathaniel in the face of Bakrie. Well, we know that the Bakrie Group can easily fool the public investors with their various corporate actions, but could they do the same thing to someone in a level of Nathaniel Philip Rothschild? I don’t think so! Remember that although BUMI is the greatest asset of the Bakrie Group, but for Nathaniel, BUMI is just one of his so many investments around the world.

So back to the question above, what is your feeling after get fooled two times in a row by Bakrie? Then Mr. Nathaniel would probably answer it with a smile, ‘What makes you think that anybody in this world cold fool me?’

So what is this all about to the declining of the stocks of BUMI? If we say that Nathaniel is deliberately ordered his bookies to pull BUMI down, so that he could buy it in cheap prices and eventually increase its stake in BUMI, then maybe it would be not that easy, because even though the majority stake in BUMI is recorded as public owned, but part of the 'public' is probably the Bakrie as well, and they will not sell their stocks. On the other hand if the goal is to get into BUMI at bottom prices, then why is the stocks or BRAU was also droppep? Bear in mind that Vallar is already holds its 85% stake.

But if some people said that Bumi stocks was continue to fall because of its debt that it is too large so it would potentially default, then it was just a rumor, like a rumor of sale of Fajar Bumi Sakti which was quoted by Reuters from the 'unnamed source' (I thought it was only local media that wrote a news like that, in fact Reuters was just the same). Because despite the debt of BUMI is very large, but the Bakrie Group is very good in treating its creditors. And unlike the Bakrie other companies that considered 'empty', BUMI is a very, very 'loaded' as there are Kaltim Prima Coal (KPC) and Arutmin in it, so it is natural if the bankers remains in touch with the Bakrie as the owner of BUMI.

Anyway, in my opinion, the catchy point here is not about whether BUMI stock will go down deeper, or if it’ll climbing up again, because it is a question that cannot be answered by anyone. But, what is the next story about the relationship between Bakrie and Rothschild? And if BUMI is finally taken out completely from Bakrie, then what will happen next?

Original article was written on September 5, 2012

Any inquiries about investment in Indonesia Stock Market? Please send an email to teguh@averepartners.com.

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