Bakrie melodrama takes a new twist

Bumi Resources, Bakrie's prized asset, sets out on a spending spree at New Year premium prices, and unsurprisingly causes confusion.
At first glance, the purchase of three local coal mining companies within a week by IndonesiaÆs Bumi Resources might look like a tidy exercise in industry consolidation. But, in the context of the Bakrie & Brothers melodrama that is both entertaining and exasperating JakartaÆs financial community, it is unlikely to be so straightforward.

Yesterday, PT Bumi Resources said in a letter to the Indonesia Stock Exchange that it had signed a share purchase agreement with Indomining Resources Holding to buy an 89% stake in Pendopo Coal for Rp1.3 trillion ($118 million). Pendopo Coal has a 94.9% holding in Pendopo Energi Batubara. The deal, to be completed within two years, follows two other acquisitions in the past week by Bumi.

On Wednesday, it agreed to buy a 76.9% stake in Leap Forward Finance, the parent of PT Fajar Bumi Sakti, for Rp2.48 trillion ($224 million) from a company called Ancara Properties, gaining control of two mines in East Kalimantan province with estimated coal reserves of 114 million tonnes. And on Monday, it said it would buy an 80% stake in the parent of another coal miner, PT Darma Henwa, for $222 million.

The acquisitions should obviously help Bumi Resources increase its coal output, and possibly cut operating costs at its other Kalimantan units, PT Katim Prima Coal and PT Arutmin Indonesia. And coal mining is an attractive industry to be in. Coal was one of the few commodities to end 2008 in positive price territory, and IndonesiaÆs coal production is derived mainly from low-cost open-cast pits.

But, a closer look at the acquisitions, for instance Fajar Bumi Sakti, raises questions and suspicions. Yufli Gunawan, president director of Fajar Bumi Sakti, is a former analyst at Bumi Resources and its coal producing units, according to the companyÆs website. The firm also has the same address as Bumi Resources.

Analysts estimate that Bumi Resources has paid an acquisition value of $2.6/tonne of reserves, which, to say the least, is pricy compared with BumiÆs own current valuation of $0.93/tonne of reserves. Not surprisingly, as one Jakarta-based international banker says, ôthe deal is perceived as value-destructive for Bumi shareholdersö.

So, inevitably, bankers and analysts û who wonÆt be named û wonder if Bumi, by paying over the odds, is channeling cash to Bakrie-controlled private or affiliated companies. The purpose is also cause for speculation as this money could otherwise be used to repay debt directly, or indirectly by bankrolling other firms which, according to Bakrie comments over Christmas, have agreed to take over group loans in return for small equity stakes in Bumi.

Bakrie & Brothers is controlled by the family of Indonesia's chief social welfare minister Aburizal Bakrie who, until the recent collapse of financial markets and Bakrie shares, was ranked as Indonesia's richest man. As well as Bumi Resources, Bakrie owns stakes in plantations, telecoms, coal and property firms. But Bumi, AsiaÆs biggest exporter of power-station coal, is the familyÆs crown jewel.

In a highly prominent deal last July, Bumi paid $549 million for a 51.34% controlling stake in Herald Resources, an Australian mining company, fighting off a competing bid by a consortium led by another Indonesian mining company, PT Aneka Tambang. The competing consortium also included Chinese state-owned mining firm Shenzhen Zhongjin Lingnan Nonfemet.

Trading in Bumi shares normally makes up about 30% of daily turnover on the Jakarta Stock Exchange, and they are widely held by domestic institutional and retail investors. Bumi also serves as a proxy for Indonesia in international portfolios.

But, fears about the Bakrie group's debts, as well as a collapse in commodity prices amid a global financial market meltdown, sent Bumi's share price from an all-time high of Rp8,750 in June to a 2008 low of Rp640 in November. Shares that the group had used to guarantee $1.2 billion of loans lost more than 75% of their value and no longer provided sufficient cover.

The future looked bleak for Bakrie and in early November local private equity firm Northstar took advantage of the situation with an attempt to get its hands on the group's mining operations. The firm, founded by Patrick Walujo, formed a consortium with its US partner, private equity firm Texas Pacific Group (TPG), and several state-owned companies, to buy the 35% of Bumi Resources that was owned by the Bakrie group (an unlisted Bakrie holding company held a further 10%). Meanwhile, other predators circled, including US hedge fund Farallon Capital, IndiaÆs Tata Group and San Miguel from the Philippines.

Resourceful Bakrie
Bakrie fought a tenacious defence against a Northstar acquisition, while periodically declaring that a deal was imminent. Observers, and even parties close to the action, were left confused and befuddled. But although analysts might complain about a lack of clarity over the details, one fact has always been clear. Bakrie had û and has û two objectives: repay its mountain of debt and retain control of Bumi Resources.

And then, on Christmas Day, Bakrie seemed to have achieved both. It announced that it had agreed to set up a joint venture with Northstar Pacific to hold 21.4% of Bumi Resources: 70% owned by Bakrie and 30% by Northstar. The transaction, which has yet to close, apparently sorted out the issue of borrowings secured by Bakrie group shares that had numbed stock market trading during much of the final quarter of last year and paralysed it for a week in October. The Northstar deal "solved the outstanding debt problem", said Nalin Rathod, president director of Bakrie & Brothers, in a press statement.

It was effectively a debt-for-equity deal and the largest of several deals arranged by Bakrie to reduce the companyÆs debt to about $625 million, according to the group. Several investment firms have taken over Bakrie loans in exchange for shares in Bumi.

On Christmas eve, Oddickson Finance agreed to sell $575 million of Bakrie debt to Northstar. Although Oddickson is ostensibly a creditor, the Jakarta media believe it is actually a special purpose vehicle for Bakrie, holding the groupÆs debt. Bakrie also said that Brentwood Ventures Ltd, a hedge fund, had paid off $150 million of debt secured by 1.3 billion Bumi shares to India's ICICI Bank in return for a 6.7% stake in Bumi.

And in November, another Indonesian private equity firm, Ancora Capital Management (Asia) took a 4.2% stake in Bumi when it bought shares held by J.P. Morgan in exchange for taking over $72 million of its debt. But, Bakrie retains the voting rights over that holding.

TPG withdrew from the Northstar deal in November after it was changed from a simple purchase of 35% of Bumi to the formation of a strategic partnership. And while Northstar went ahead, it is hard to believe that it will be content with 30% of 21.4% û that is 6.42% û of this prized asset. Meanwhile, the implications for Bumi's minority shareholders remain uncertain.
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