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Between Medco, Newmont, and Bumi Resources

On Friday, July 1, 2016, the management of Medco Energi Internasional (MEDC) announced that the company will acquire PT Amman Minerals International (AMI), which previously acquired a 82.2% stake in PT Newmont Nusa Tenggara (NNT) at US $ 2.6 billion or equivalent to Rp34.3 trillion (based on the exchange rate Rp13,200 per US Dollar), thus MEDC will become an indirect shareholder in NNT. Soon after that MEDC shares rose 24.7% in a single day onto Rp1,870 per share, drawing the attention of stock traders, but in this writing I will invite you to dig deeper about Medco's corporate action, complete with the investment opportunities that may arise. Okay, here we go!

At the beginning, Newmont Nusa Tenggara was owned by three shareholders, ie Newmont Corp. (United States) who hold 45% stake, Sumitomo Corp. (Japan) who hold 35%, and a local company named PT Pukuafu Indah who hold 20%. Later, based on regulations from the Government of Indonesia, Newmont and Sumitomo Corp as foreign entities must sell/divested part of their stakes so that they would hold a (maximum) 49% stake in NNT. Because Newmont and Sumitomo together hold 80% stake in total, there was a 31% stake in NNT to be divested. At first the Government would buy the divested shares, but they do not have the funds, so that the shares were auctioned to several private groups.

And the one who able to seize the opportunity was Bakrie Group. In 2009, together with the Provincial Government of West Nusa Tenggara, they established a joint venture entity called PT Multi Daerah Bersaing (MDB). Bakrie Group through Bumi Resources Minerals (BRMS) holds a 75% stake in MDB, while the remaining 25% held by the Provincial Government. MDB then acquired a 24% stake in NNT for US$ 850 million. Thus, BRMS indirectly holds 18% stake in NNT.

Then here’s the fun part: Since the very beginning, the Bakrie Group had intended to acquire a fully 100% stake in NNT, or at least 51% so that they would be the controlling shareholder of the company, just like when they successfully acquired majority ownership in Arutmin, Kaltim Prima Coal (KPC), and others. After MDB successfully acquire 24% stake in NNT, there were the remaining 7% stake in NNT to be divested by Newmont and Sumitomo Corp, but the Central Government remained unwilling to take the remaining shares. MDB had offered to also buy the remaining 7%, but this time the Newmont Corp flatly refused to sell their shares to Bakrie, because they knew that by doing so they may lose control of NNT. Although Newmont Corp and Sumitomo are only allowed to hold a maximum 49% stake in NNT, but they still want to have a full control over the company, by making the other shareholders to hold stakes in smaller amounts than theirs.

So now the point of the game lies on PT Pukuafu Indah, which is owned by a local businessman named Jusuf Merukh. Mr. Merukh had no intention to become the controlling shareholder in NNT, but his bargaining position becomes very high after the Bakrie Group approached him to acquire their 20% stake in NNT, while Newmont Corp also continues to persuade Mr. Merukh not to sell his stake to Bakrie.

And it looks like Newmont Corp came out as the winner. In 2010, a local company called PT Indonesia Masbaga Investama (IMI) acquired a 2.2% stake in NNT for US$ 71.3 million from PT Pukuafu, so now PT Pukuafu only held 17.8% stake in NNT. Interestingly, IMI obtained the money from Newmont Corp in form of loans, so it can be said that it was Newmont Corp who acquired the shares. After this, even if the Bakrie Group through MDB successfully wiped out the 17.8% stake owned by PT Pukuafu plus 7% of the divested shares, they will only hold a 48.8% stake in NNT in Total, so Newmont Corp along with Sumitomo will still have a larger stake in NNT (49.0%), so of course they will still be in control of NNT. Bakrie Group itself could not acquire 2.2% stake of NNT which held by IMI, because since the beginning the company has been backed up by Newmont Corp.

After that, the Bakrie Group stop ‘chasing’ Newmont.

Time elapsed. After 2011, the prices of commodities including coal, gold, and copper began to fall, and continued to fall until Newmont Corp itself began to have financial difficulties, as well as the Bakrie Group. NNT’s financial performance itself continued to fall, where in 2014 the company lost US$ 114 million (NNT is a private company private, but its financial statement’s summary can be found in the financial statements of BRMS). Also in 2014, Bumi Resources (BUMI) as the parent entity of BRMS began to have problems with its huge debts, therefore they sell some of their assets to pay debts. Because the Bakrie Group realized that they have no chance in acquiring NNT as a whole, their 24% stake in NNT become one of the assets being considered for sale.

Finally on June 30, 2016, BRMS through MDB agreed to sell its stake in NNT to a company called PT Amman Minerals International (AMI), which had previously acquired NNT shares which owned by Newmont Corp, Sumitomo, and IMI, and AMI in turn will be acquired by MEDC. However, based on the announcement from the management of BRMS, the sale will only be effective after receive approvals from the Government, MDB’s lenders (because MDB acquired a stake in NNT by using debt), and other approvals required by the capital market authorities. In essence, BRMS only agreed to sell their stake in NNT to Medco Group, but about the price, etc., it is still under negotiation.

But if we look at the announcement from the Medco Group as a reference, where MEDC will acquire AMI which holds a 82.2% stake in NNT for US$ 2.6 billion, and we assume that AMI paid the same price for acquiring NNT shares from Newmont Corp, Sumitomo, IMI, and MDB, then BRMS as the holder of an effective 18% stake in NNT would receive US$ 570 million.

An Investment Opportunity in MEDC? Or BRMS instead?

If it is true that Medco acquired NNT from BRMS at a price of US$ 570 million, it means that BRMS just sold NNT in a losing position, because as already mentioned above, BRMS through MDB acquired a 24% stake in NNT for US$ 850 million in 2009, so that BRMS as holder of a 75% stake in the MDB has paid US$ 637.5 million (850 million x 3/4). On BRMS’ financial statements, it is clearly stated that the value of their shares in NNT has grown into US$ 1 billion because of the accumulation of net income.

So if BRMS only receive payment of US$ 570 million, the company will report ‘loss on disposal of investments’ in its financial statements, because although BRMS obtain US$ 570 million in form of cash, but the company also lost US$ 1 billion of its investment assets. But considering the reputation of the Bakrie Group, it is also possible that they sold their stake in NNT to MEDC at premium price, so that they make money instead of losses, from the transaction.

But one thing for sure, MEDC acquired a 82.2% stake in NNT for US$ 2.6 billion. The book value of NNT itself was US$ 3.12 billion in the first quarter of 2016, which means that MEDC acquired NNT at PBV of 1.01 times, aka very cheap considering that NNT has returned to make profit in 2015, which continued in 2016, and the value of the profit could be even greater in the future of the price of gold continues to go up (the price of gold began to rise since six months ago). So although MEDC acquired NNT using borrowed funds (of course) from three banks namely Bank Mandiri, BNI and BRI, but the profits generated from the investment will be much greater than the interest to be paid.

Thus, it is quite clear that the opportunities lie in MEDC, not BRMS, let alone BUMI. At the price of Rp1,870 per share, MEDC’s PBV is only 0.7 times, obviously cheap, although it is also worth noting that MEDC is never ideal for long term investment because of its extremely small profit margin as an oil company, even at the times when the oil prices were in the level of US$ 100 per barrel. However, MEDC is also not that bad, so when there is a good news like this, the stock might offer an opportunity for medium-term trading, especially since the news about Newmont’s acquisition would be ‘preserved’ in the coming months, as the completion of the acquisition process still has to wait for the approval from the Government and the AGM.

However, given the MEDC is not good for long term investment (unless if MEDC’ net income jumps later because of the additional profit from Newmont, but even if that actually happens, it wouldn’t be in near future), then you should be cautious and watch for the right timing (to buy). And what about BRMS? Well, although I do not see that the company's financial performance will improve even after later the acquisition process is complete, but its stock is still likely to be ‘playing’ because of this story about Newmont, though, of course, to buy stocks based on such analysis is a speculation. Your call!

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