Bakrie keeps Indonesia guessing

A lack of details about Bakrie's sale of its 35% stake in Bumi Resources suggests that the contest has barely started.
JakartaÆs financial community is buzzing with speculation and scratching its collective head with confusion as it tries to digest, interpret and, well, guess how the most significant equity deal in the world today will play out û right on its own doorstep.

On Saturday, Bakrie & Brothers announced that it would sell its 35% stake in Bumi Resources to Northstar Pacific, an affiliate of the US-based Texas Pacific Group (TPG), for $1.3 billion. The price-tag is based on BumiÆs share price a month ago, just before the shares were suspended.

But, so little information has been revealed that observers believe the announcement merely serves as an invitation for other parties to throw their hats into the ring.

Northstar, which also controls PT Bank Tabungan Pensiunan Nasional and has stakes in PT Alfa Retailindo and PT Adaro, is run by Indonesian banker Patrick Walujo û so it has Indonesian credentials.

But it is inconceivable, say bankers with some knowledge of the machinations involved, that TPG would not have made the final decision to proceed. It is understood that UBS is advising Northstar, but the Swiss bank has not confirmed that it is involved.

The sale of Bumi, the worldÆs largest exporter of thermal coal and the ôcrown jewelsö of IndonesiaÆs most powerful holding company, is necessary in order for Bakrie to make an early repayment of $1.2 billion on its maturing short-term debt. Bakrie is vague about the reasons for the early payments, but there are widespread reports the company is in desperate need of cash as the shares, which are pledged as collateral for the loans, are losing their value.

Bakrie is selling the Bumi shares at a 61% discount to the price it paid when it bought them from the Bakrie family in a cross-ownership transaction early this year. Danatama Makmur was the adviser on that deal. The value of BumiÆs shares collapsed as world markets dived in early October, and trading on the Jakarta Stock Exchange was stopped after BumiÆs share price fell 32% in one day, on October 6.

But few aspects of the deal are certain. Credit Suisse, who is advising Bakrie, was reluctant to answer any questions yesterday about the sale, which at this stage appears more like the posturing at the weigh-in before a boxing bout than the contest itself.

The Swiss bank could not confirm the price or timing of the transaction; who needs to give approval for it to go ahead; whether or not Bakrie will have a buy-back option; why Northstar was chosen over rival bidders; whether a consortium including state-owned companies such as Bukit Asam would join Northstar; or what would be the extent of BakrieÆs residual interest in Bumi.

ôIt is more an agreement to agreeö, says one investment banker, ôwith negotiations at a preliminary stage.ö Apparently, there is a general understanding about the price, but one major hurdle is likely to be whether Bakrie will be granted that buy-back option or at least, a pre-emptive right to purchase the stake when Northstar makes its exit û which as a private equity firm, it is sure to do at some point. Aburizal Bakrie, the conglomerateÆs patriarch, has been fighting hard to ensure he doesnÆt lose his prize for ever, says a Jakarta-based analyst, who suggests ôa pre-emptive rightö arrangement might be negotiated.

There is speculation that the buy-back option has even been the subject of cabinet meetings chaired by President Susilo Bambang Yudhoyono, and indications that Aburizal Bakrie, who is the senior welfare minister and prominent member of the leading Golkar party, is under enormous pressure to concede the issue. One Jakarta-based banker says that there are ôsigns that he is crumblingö.

The reason why such a powerful man is under such pressure is not difficult to find. Since share trading in Bumi, Bakrie & Brothers and Energi Mega Persada, a Bakrie-controlled oil and gas company, were suspended for almost a month, billions of dollars and trillions of rupiah have been immobilised. Bumi, whose market cap has fallen from $18.6 billion in June to a mere $3.9 billion based on the sale price of the 35% stake, normally makes up about 30% of daily turnover on the Jakarta Stock Exchange, and its shares are widely held by domestic institutional and retail investors. Bumi also serves as a proxy for Indonesia in international portfolios.

Furthermore, as the Jakarta-based banker points out, many shares are tied up in the large repo market û where a seller promises to buy back shares from a buyer at an agreed price û and ôlocal brokers are screaming for a resolution of the problemö.

But few expect the deal to be completed quickly. Another Jakarta-based banker says he reflects a general view of ôoutright scepticismö because there are ôsimply too many hairsö to disentangle.

Approval is needed both by the government and, of course, the parties directly involved. Any buyer will need to conduct due diligence û and if there is, as seems likely, a consortium of buyers, then that process would take even longer, as each would need to make their own assessment.

Due diligence will fall under two broad headings û control and valuation û neither of which, in BakrieÆs case, will be straightforward. It is not clear, and never has been due to BakrieÆs complex, if not opaque, shareholding structure, just how much Bakrie will still own once the 35% stake is sold. A buyer would certainly want to be sure that it was taking control of Bumi and not discover that a residual Bakrie holding was rather more than that. Similarly, a prudent valuation of Bumi might be problematic, for example if contingent liabilities for environmental damages are taken into account.

Meanwhile other potential buyers are circulating. They include the US hedge fund Farallon Capital, and also IndiaÆs Tata Group and San Miguel from the Philippines who themselves might form a joint bid for the Bumi stake, according to a Hong Kong-based banker. Other potential suitors are thought to be Australian and Malaysian.
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