Friday, September 28, 2012

Indonesia’s Giant Coal Company Bumi price crash: A tale of two princes

"In India, corruption is under the table, in China, corruption is over the table while in Indonesia, corruption includes the table." Anon (previously quoted in Asia Times Online article "
The Wages of Corruption", August 19, 2006).

"Bumi launches probe on financial irregularities" read the mundane business headline on September 24 as the London markets opened for trading. The subject of the article was a company called Bumi PLC, a holding company listed in Indonesia that owned two major businesses in Indonesia, namely Bumi Resources and another coal company called Berau Coal; both are listed in Indonesia; the two businesses made Bumi the biggest coal miner in the country.

(For context, saying "biggest coal miner in Indonesia" is like saying "biggest retailer in the United States" or the "biggest vodka manufacturer in Russia"; it's big, really big).

Within a few minutes, investors panicked and sold their shares desperately, pushing stock prices down over 30% on the day of infamy. Indonesian markets, which had almost been lazing into a close by the time the announcement came out, pushed down the value of the two businesses listed in Indonesia by similar amounts. Credit markets froze on the news, as everyone from Japanese trading houses to Indian stock analysts and Australian mining experts started counting the potential impact from the (possible) unraveling of Indonesia's biggest coal miner.

The tale goes thus: an ambitious scion of a British banking dynasty decides to expand his footprint, going into exotic Asia; he scores a major deal at a valuation which appears reasonable in the context of strong growth potential and operating profits. Then the patina starts wearing off, and pretty soon everyone is at everyone else's throat.

So what makes this story different from say the scandals that rocked Enron in the good old days, or more recently brought Barclays Bank to the forefront of newspapers? For one thing, the story brings together two unlikely partners, both princes and both presumed to have ambitions far exceeding mere wealth. The two - Nat Rothschild and Aburizal Bakrie - are household names respectively in the UK and Indonesia. When they came together barely a couple of years ago to launch an audacious capital-raising exercise, eyebrows were furrowed across both London and Jakarta.

What was the scion of one of the banking world's most respected names doing with an Indonesian businessman-politician, especially in the shady business of coal (puns intended)? Add to the intrigue that the venture had been funded with an empty shell listing in London - essentially investors had put about US$1 billion on the strength of the Rothschild name into a company called Vallar Ltd; this money had been handed over to the Bakrie family in exchange for the stakes in subsidiary companies, albeit at a valuation that left the Bakrie family as major shareholders of the now-renamed Bumi PLC.

The deal was complex enough, but its timing was priceless: the Bakrie family was fending off accusations of negligence around one of its related businesses that was at the center of a mud volcano in Java that killed a number of people, inundated nearby lands and resulted in clean-up costs estimated to be as high as $1 billion. Since then, Aburizal Bakrie has sealed his bid to be the presidential candidate of the Golkar party in the next elections, slated for 2014 (in itself something that raised eyebrows as the announcement was made almost precociously early in a country where politics tended to move at a more glacial pace).

Even as Aburizal Bakrie gave up operating control of his businesses to his siblings and other kith and kin to focus on his political ambitions, the Internet has been rife with conspiracy theories about his continued involvement in the day-to-day operations of the far-flung Bakrie group, which operates in real estate, telecoms, plantations, oil exploration and coal mining to mention a few.

To be fair, Aburizal Bakrie deserves credit for business acumen and strategic planning that people who have met him talk about in awe. In the aftermath of the Asian financial crisis, the Bakrie family quickly emerged as one of the very few non-Chinese-owned businesses in Indonesia to successfully pay down its debts and retain management control of the businesses at a time when foreign creditors were seizing lucrative businesses by the dozen.

Business and politics, though, mix very differently in Asia. Whilst in India, businessmen are essentially forced to (or are motivated to) buy out politicians, in China many political bigwigs or their relations have become businessmen of note much to the embarrassment of the Chinese Communist Party. In Indonesia though, a curious dichotomy of sorts was established under the dictatorial rule of Suharto wherein politics was the realm of the military elite from Java even as business were under the nominal heads of Chinese-owned companies (many Chinese in Indonesia were already very rich and coddled by Suharto's predecessor, Sukarno).

"Nominal" being a key word in the preceding sentence - it was widely accepted that in order to succeed Chinese businessmen essentially maintained financial relations with members of the Suharto clan (who frequently also ran numerous businesses on their own account).

As the Asian dominoes slipped in 1997, the rage of the average Indonesian was directed at the Chinese businessmen who were seen to dominate businesses even as ordinary folks suffered in the crisis; it was the anger against Chinese businessmen and regime corruption that eventually toppled Suharto.

(Familiar stuff for anyone reading about the Arab Spring and other regime changes, right: except the events in Indonesia preceded the Arab Spring by over a dozen years.)

In the aftermath of Suharto, business and politics realigned (hence the new adage quoted above) with local businessmen becoming much more prominent. Military and political bigwigs secured big concessions in areas such as natural resources and infrastructure. Foremost in this group of often relatively young, dynamic and ambitious Indonesians was Aburizal Bakrie, already involved for the previous decade in energy deals, including refineries.

Accounts differ on what really happened, but there is general consensus that the Bakrie family made it big on its acquisition of lucrative coal mines from a couple of foreign companies; the transaction essentially cemented the group's cash flows and allowed it to expand rapidly into other businesses. In almost all cases, it used significant amounts of external debt, thereby keeping the rapidly growing businesses under the control of the family as against, for example, publicly listing the various businesses which may have diluted the family's position.

Along the way, every time the Bakrie family needed money in circumstances that were generally considered impossible for most banks, somehow the money always came to them, particularly from banks that had significant private banking operations. We will certainly never know the truth of the routing and sources and influence of such money flows.

What we do know is that for some reason, not satisfied with the rapid expansion of personal wealth (or perhaps because of it) at some point in the past five years Aburizal Bakrie may have chosen to enter politics strongly. Others contend that the decision was taken well over a decade ago, and this commitment was part of the support he received from some backers.

Here is why the Internet is abuzz on that issue - every ruler of Indonesia since independence from the Dutch has come from Java; and most have been endorsed directly by the hereditary clan chiefs of Java. For someone like Aburizal Bakrie, who hails from Sumatra rather than Java, and is furthermore said in some quarters of being of Arab descent, that is quite something. Thus, securing a different type of ruler is likely to have long-term consequences.

That is what makes what happened next so much more curious - being picked as the investment target by the Rothschild-backed Vallar suddenly brings wider overtones to the matter. As historians gleefully recount, Europe's ancient banking families were at the center of many a war in the continent from the middle of the 17th century; that a member of one of the banking dynasties should somehow be involved in a modern-day geopolitical adventure is an intriguing prospect.

Whatever be the motivations and the grand plan when this was concocted, the fact is that Bumi has been in a tailspin pretty much since its listing in London; starting at 1,000p (or 10 pounds a share), the shares closed barely above 160p a share on Monday. Along the way, specifically last year, there was a colorful drama between the Rothschild group and the Bakrie family by way of a public spat over the company's finances. A ham-handed attempt to remove the Rothschild influence was thwarted by independent directors, but he lost his position as co-chairman on that particular stunt.

The funny thing for many observers (but certainly not for investors), including hardened Asian journalists, was that the announcement of a probe by Bumi was itself not a big deal when one considers the colorful history of many an Asian billionaire; in that context a decline of 22% on Friday (before the probe was announced on Monday by the company) and a decline of another 30%-plus on Monday clearly showed that a bigger confidence issue had come to the fore.

Had one of the main shareholders bailed?

This story, as with most Asian sagas, is set to unravel further. At its heart is the reputation of a centuries old banking dynasty in Europe, an Indonesian businessman and a whole lot of geopolitical overtones.

Now who was it who said finance was boring?
Joyo News Jakarta By Chan Akya

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