Sinarmas Acquired Berau Coal: Why?

Indonesian largest but -on the other hand- also most indebted coal company, Bumi Resources (BUMI), has just released its financial statements for the period of first quarter of 2015 (late as usual). And the result? Well, it’s just getting worse. BUMI reported a net loss of US$ 344 million, leading to a capital deficiency of US$ 1.2 billion. On its balance sheet, from US$ 5.7 billion of liabilities of the company, US$ 3.6 billion of which are bank debts that will mature in less than one year. With the current conditions where the coal price is still falling down, how could BUMI repay those short-term debts?

Though seems bad, but so far BUMI never had default/failed to pay its debt. In November 2014, the company had failed to pay the coupon of one of its bond that issued in Singapore, but the company only defaulted on the coupon, not the bond itself (because the bond would mature in 2017). And even then, the management somehow could obtain protection from the courts in Singapore to protect the company from possible lawsuits from bondholders (because their right to receive the payment of coupon/interest have been violated by BUMI).

However, for Berau Coal Energy (BRAU), the story is totally different.

BRAU was formerly belonged to Recapital Group, an investment company run by two young businessmen, Sandiaga S. Uno and Rosan P. Roeslani. Because Rosan was a subordinate of Nirwan Bakrie, which is the CEO of Bakrie Group, then automatically BRAU had a direct relationship with the Bakrie Group and BUMI, Bakrie’s largest and most important asset. In 2011, when the Bakrie Group had an agreement of share swap of BUMI with Bumi Plc, an investment company belonging to Nathaniel Rothschild that listed on the London Stock Exchange, the shares of BRAU also including in the agreement. As a result, in 2011, both Bakrie and Recapital hold a stake in Bumi Plc, while Bumi Plc itself holds a 75% stake in BRAU (later increased to 85%), and 29.2% stake in BUMI.

Later, as you may already know, the cooperation turned into dispute. And after a prolonged fight for nearly two years, in February 2013 Nat Rothschild eventually lost the game, where Bumi Plc should return the 29.2% shares of BUMI to the Bakrie Group, but they still has BRAU (Bakrie and Recapital had previously been sell their shares in Bumi Plc to Samin Tan, the owner of Borneo Lumbung Energi & Metal/BORN, another Indonesian coal company). So starting from February 2013, the Bakrie and Recapital acquired BUMI back, but they lose BRAU to Nat Rothschild (and Samin Tan, but it seems that the pair separated not long after, where Nat managed to kick Samin out of the company), through Bumi Plc. The name of Bumi Plc then changed into Asia Resource Minerals Plc (ARMS), and is still listed on the London Stock Exchange, UK.

Well, here’s the main story: Just like BUMI, Recapital manages BRAU by way of 'Bakrie method', where the company is burdened by a lot of debt. So BRAU, in hands of Recapital, was one of the most indebted coal company in Indonesia, once again, just like BUMI. And both the Bakrie Group and Recapital were very great in treating the creditors, that although they have difficulties in paying their debt due to the poor situation of the coal industry, but they were always able to escape from the threats of default.

But it looks like the new owner of BRAU, Nat Rothschild, does not have the skill, while BRAU was already in heavy debt. In early 2015, there was a warning that BRAU cannot repay the bond debt of US$ 450 million which would mature on July 8, 2015. But pity, the management was not able to lobby the court (as the management of BUMI did) or the bond holders itself, to delay the payment. And consequently, these bonds are now default.

The default status requires Nat Rothschild to sell assets belonged to BRAU at any/low price, or even to sell BRAU itself, in this case the majority of shares, so that Nat will no longer the controlling shareholder at BRAU.

And it seems that the opportunities were captured by Sinarmas Group. In a disclosure released in April 2015 by United Fiber System (Unifiber), a coal company of Sinarmas Group that is listed on the Singapore Stock Exchange, Unifiber management stated that the company has reached an agreement with Nat Rothschild to acquire ARMS, the parent company of BRAU (and ARMS actually had no other asset, but BRAU only).

Logo Unifiber, a subsidiary of PT Dian Swastatika Sentosa (DSSA), a coal company of Sinarmas Group

The question now is, why Sinarmas dare to acquire BRAU? Does not that mean that they are the ones who now have to pay the debt of US$ 450 million earlier? And it even not including another bond worth US$ 500 million which will mature in 2017. Okay, let's say Sinarmas have enough funds to pay off all that debt, which, when coupled with the costs to acquire BRAU itself, then they should spend money of more than US$ 1 billion.

Then what is so special about this BRAU, that they are willing to spend that much money?

Because if you look at the latest financial statements of the company for the period of third quarter 2014 (since BRAU had defaulted, the company delaying the release of its financial statements. And this is different from the BUMI which, though still late as usual, but the financial statements for the first quarter of 2015 has been released), the net equity of BRAU also began to be negative alias capital deficiency, because the company continues to suffer losses. The share price itself continued to fall to finally suspended at Rp82 per share.

Meanwhile, if we assume that the Sinarmas Group should spend exactly US$ 1 billion or equivalent to Rp13.2 trillion to acquire a 85% stake in Brau (through ARMS), then that means they buy BRAU shares at a price of.. Rp450 per share! Make sense? From the point of view of retail investors, obviously not! Why did you have to buy BRAU at a price of 450, when you can buy it at the market price of 82??? (although for the moment can not, because the trading is currently suspended).

But the same questions may also arise if you look at the fact that Bakrie Group, when they successfully retake the 29.2% stake in BUMI from the hand of Bumi Plc, they had to pay US$ 501 million for the stake, which is equivalent to approximately Rp1,000 per share, or faaaar above its current market price of Rp51 per share. Interestingly, even Nat Rothschild was actually not going to sell BUMI at any price if ain’t forced to do so. So how did these two giants (Bakrie and Rothschild) got involved in a race to acquire a penniless company, even at a high price?

And now why even Sinarmas join the race? Okay, it wasn’t BUMI that they acquired, but BRAU, but it is because the opportunity lies at BRAU. Sinarmas itself may not be able to acquire BRAU if not for the default. So think about it: If later BUMI eventually defaulted as well (so that Bakrie have to sell it off), then Sinarmas, and possibly also other large groups, may submit a bid for BUMI. The question once again, what is so good about these BUMI and BRAU?

And if Sinarmas dare to buy BRAU, even at a price that is far above the market price, does it mean that smaller investors can also buy the same stock?

Anyway, since the article is already long enough, then the rest will be discussed next week. But before that, you might be able to answer the questions above through the comments field below. A little clue, to be able to answer the questions above, you have to think like the majority shareholder on BUMI and BRAU, and not merely retail shareholders who cannot control the company.

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