Bitter feud with Bakries for control of ailing mining group comes to a head this week in City showdown
It’s worth buying a share just to enjoy the show. The battle of Bumi will be fought at a shareholder meeting this Thursday, a climax to a City fiasco involving billionaires, feuds, whistleblowers, alleged computer hacking and claims that $1bn (£645m) is missing.
Coal mining in Indonesia, Bumi’s raison d’etre, has taken a backseat. Instead, the City has been fascinated by plot twists that have reduced a company that aimed for the FTSE 100 index to a shambles. London’s reputation as a serious financial centre hasn’t fared much better.
Thursday’s argument is about control of the boardroom. Will banking scion Nathaniel Rothschild overthrow his former colleagues and return to “save” Bumi from what he regards as a policy of appeasement towards Indonesia’s powerful Bakrie family, his one-time partners in the venture?
If so, a board led by City grandees including Lord Renwick, former UK ambassador to Washington, and Sir Julian Horn-Smith, one of the architects behind the rise of Vodafone, will suffer an astonishing defeat.
Or will those Bumi directors, who say Rothschild’s “confrontational style” would complicate further a mess he helped to create, survive?
By way of sub-plot, they have hired Rothschild Group, the investment bank under the French branch of the family’s influence, to work to defeat Rothschild, a fifth-generation member of the UK side of the dynasty.
This story started in 2010 when Rothschild, then 39, put up £100m of his own money and invited others to join him in a new stock market-listed shell company called Vallar. The vague goal was “to acquire a single major business or operational asset in the global metals, mining and resources sector”.
Rothschild had seen such acquisition companies operate in the US during his time at hedge fund Atticus. He thought he could launch a similar enterprise in London with the help of famous non-executive directors, including Renwick, Horn-Smith and former oil executive Sir Graham Hearne, plus Credit Suisse as adviser. He was right. His father, Jacob Rothschild, a highly successful investor, chipped in for a small stake and the rest of the money followed from the likes of Schroders, BlackRock and the Abu Dhabi Investment Council. With £707m in the bank, Vallar was in business.
JP Morgan Cazenove suggested the acquisition itself. The blue-chip broker had advised Bumi Resources, Indonesia’s largest coal miner – controlled by the Bakries – and Berau, its fifth largest. Vallar agreed to take a 25% stake in the former and 75% in the latter. It was, in effect, a reverse takeover with the Bakries gaining a 47% stake in the London-listed company, though their voting rights would be capped at 29.9%.
“We have been presenting to you the best opportunity any of us can see in the mining sector worldwide,” wrote Ian Hannam, a senior JP Morgan Cazenove banker, in an email to Rothschild in November 2010.
Would Vallar’s investors agree? Would Bumi Resources’ towering debts and Bakries’ reputation in Indonesia for controversy prove a turn-off? It wouldn’t matter. Under the rules of Vallar’s formation, shareholders didn’t get a vote. Speed of execution was deemed more important and the approval of the Vallar board was final.
On completion, another unusual feature was triggered. Rothschild and his associates were able to convert their “B” shares into a stake of 6.7% in Vallar – in effect, a bonus for getting the company up and running. Rothschild became co-chairman alongside Indra Bakrie, younger brother of Indonesian presidential hopeful Aburizal. Confidence was high. Rothschild spoke about investors in Vallar, renamed Bumi after the deal, securing a return of “two or three times their money”. The share price initially rose to £14 from the subscription price of £10.
But trouble came quickly. As the price of coal fell, so did that of Bumi’s shares. Outside shareholders were astonished to learn that the Bakries had pledged their shares as collateral to cover a $1.3bn loan from Credit Suisse. In November 2010, they sold half their Bumi shares to Samin Tan, another Indonesian commodities tycoon. That took the count of wealthy Indonesians on Bumi’s register to three – the other being Rosan Roeslani, who had contributed the Berau business and was the subject of reports this weekend that he might sell his stake.
Despite the complicated set-up, the outside world presumed that it was manageable. That view was exploded when Rothschild wrote a blistering letter to the boss of the main Indonesian operation, Bumi Resources, calling for a “radical cleaning up.” He questioned why substantial loans to companies affiliated to Roeslani had not been called in.
Rothschild’s public criticisms caused a storm in Indonesia. Indra Bakrie and Tan wanted to remove Rothschild and four others from the board of the London-listed company. Crisis was avoided only when Horn-Smith and Renwick made an eleventh-hour dash to Jakarta to plead for a truce. It was agreed that Rothschild would step down as co-chairman but stay on the board. Last October he resigned anyway, accusing Tan, by now Bumi chairman, of failing to protect minority shareholders.
Rothschild said it would be a disgrace for Bumi to pursue a proposal from the Bakries to sever their ties with the venture by buying back the Bumi Resources stake, given that the board had launched an investigation into allegations of serious financial irregularities in the Indonesian operations. Rothschild signed off with a declaration: “I am determined to fight for my fellow investors and can do that better from outside the tent.”
He scored a quick success when the UK Takeover Panel ruled that the Bakries and Roeslani should have been regarded as connected parties at the outset. It capped their voting rights in Bumi at 29.9%, even though, with Tan, they hold 57% of the shares. The effect was to create an opportunity for Rothschild to get himself back on the board with a new crew of directors. His voting power alone, enhanced by the cap on the Indonesians plus the bonus “B” shares, stands at 18%.
The past month has seen bitter public rows almost daily. The most important centres on the board’s investigation into the allegations of irregularities in the operating companies. “Circumstantial evidence supports a number of the allegations,” it concluded, “But, due to the unwillingness of key parties to be interviewed and provide information as well as provenance issues, the allegations have not been substantiated.” A spokesman for the Bakries has said: “We deny there have been financial irregularities at Bumi involving the Bakrie Group.”
The board said it would engage with Indonesian authorities and the UK Serious Fraud Office, and pursue claims where there was a realistic prospect of recovery. But it would not publish the findings of the board’s investigation for fear of breaching Indonesian law. There was “clear evidence” that the information that formed the basis of the investigation, which came from a whistleblower, had been obtained by hacking of emails, it said. Rothschild has denied the hacking allegations, calling them untrue and defamatory.
Rothschild regards the board’s stance as feeble, alleging that up to $1bn has gone missing and vowing that his new board would take a stronger approach to litigation. The board’s supporters counter that only the current non-executives and Tan are capable of delivering a clean and desirable divorce from the Bakrie Group. Rothschild’s aggressive strategy is high-risk and could generate years of legal claim and counter-claim, they argue. For their part, the Bakries say they will abandon their separation proposal if Rothschild wins Thursday’s vote.
The mess, then, may not be resolved by this week’s confrontation. A Rothschild win – marginally the more likely outcome – could merely see the battleground move to the courts and become a dispute over the original “relationship agreement” between the main parties.
In the meantime, don’t spare any tears for the original Vallar shareholders who, at Bumi’s current sunken share price, are sitting on a 60% loss on their investment. They funded this disaster without knowing what assets they would be investing in, or demanding approval of the deal Rothschild and his supposedly wise non-executives would produce. They took a blind punt on big reputations. They deserved to lose. Nor – barring a miracle – will any use Thursday’s meeting as a platform to apologise to their own investors or for the collateral damage to the City.