Rothschild and Bakries join hands in complex M&A deal

London-listed blank cheque company Vallar becomes a listing vehicle for the Bakrie brothers through an M&A deal valued at around $3 billion.

One of the year’s most complex M&A deals, involving a backdoor listing and well-known banking family scion Nathaniel (Nat) Rothschild and Indonesian tycoons, the Bakrie brothers, was announced yesterday. The deal, which has a value of around $3 billion, creates an Indonesian “resources champion” and allows the Bakries to become the first Indonesians to have a London Stock Exchange-listed firm. It is also a reflection of how established money from the West is increasingly looking east for higher growth and better returns.

Integral to the transaction is Vallar, a company founded by Nat Rothschild and mining industry veteran James Campbell. Vallar is essentially a company created to effect an acquisition, also termed a “blank cheque company”. In July, Vallar raised £707 million ($1.07 billion at the time) through an initial public offering on the London Stock Exchange to bankroll its plans.

The fundraising, which was led by Credit Suisse with J.P. Morgan Cazenove acting as joint bookrunner, exceeded Nat Rothschild’s stated target of £600 million. Rothschild and other founders invested £100 million. The success of the IPO was a reflection of how investor confidence has returned to the capital markets only two years after the credit crisis -- Vallar had no assets and raised money on the back of its stated intention to use the funds to go out and find a deal.

Both Rothschild and Campbell have links to Russia (Rothschild was a cornerstone investor in the Rusal IPO in Hong Kong early this year, paying $110 million for a 4.5% stake), which led to some speculation that Vallar would be targeting Russia for deals. Indeed, Vallar itself said in its offering document that “the focus regions include the Americas, Russia, Eastern Europe and Australia”.

However, Vallar never specifically said Russia was top of mind. It only said it will “focus on regions and commodities where the extensive network and strong prior operating and investment experience of the Vallar team can be leveraged”. And it added that other regions could be considered where attractive investments are available.

Vallar also laid down criteria for the kind of investment it was seeking: a stable producing asset where the owner has an identifiable issue, such as requiring additional management or operational expertise that the Vallar team is well placed to address; a business that requires a capital injection and operational expertise to execute a significant expansion plan; and an opportunity to simplify a complex and diverse group through application of corporate finance and structuring expertise.

The deal with the Bakries ticks all the boxes.

Vallar will buy 75% of Berau Coal Energy for around $1.58 billion. This will be paid through a combination of $739 million in cash for a 35% stake, translating into Rp540 (6 US cents) per share, and the issue of 52.3 million new Vallar shares at £10 each for a 40% stake. Vallar will also acquire 25% of Bumi Resources, in exchange for the issue of 90.1 million new Vallar shares at the same issue price of £10 per share. The latter equals Rp2,495 per Bumi Resources share and makes up the rest of the value of the deal.

Berau, which has mines in East Kalimantan and is Indonesia’s fifth-largest producer of thermal coal, is currently 91%-owned by Indonesian investment firm Recapital Advisers. Berau was acquired by Recapital after an auction process conducted last year and 9% was subsequently floated on the Indonesia Stock Exchange in an IPO earlier this year. Credit Suisse advised and financed Recapital to buy Berau. Berau shares closed at Rp520 on the Indonesia Stock Exchange (IDX) yesterday.

Bumi Resources is the flagship company of the Bakries and Indonesia’s largest coal producer. It had a market capitalisation of around $5.9 billion based on yesterday's closing price of Rp2550 on the IDX. Last year, China’s sovereign wealth fund, China Investment Corporation (CIC), bought $1.9 billion of high-yield debt in Bumi. Investors had expected that CIC would swap part of this debt into equity, but, according to media reports earlier this year, no agreement on terms could be reached. Hence, CIC continues to hold the debt, on which it is earning an IRR (internal rate of return) of 19% over the six-year life of the facility.

The Vallar stock that is issued as part-payment will make the Bakrie group the largest shareholder in Vallar with a 43% stake, and Vallar will be renamed Bumi after the deal. Recapital will own another 25% of Vallar, existing Vallar minority shareholders will own 28% and Vallar founders will be diluted to 4%. Since its IPO Vallar has traded in a range between £9 and £9.90. It closed at £9.75 before trading was suspended yesterday.

Nat Rothschild may have agreed to rename his investment company and concede the majority shareholding, but he has not agreed to completely relinquish control. Even though Bakrie will have a 43% economic interest in Vallar, its voting rights will be capped at 29.9%. This structure also neatly sidesteps the issue of Bakrie having to make a general offer to Vallar shareholders, by leaving their voting rights under the 30% trigger.

Meanwhile, Vallar’s acquisition of 75% of Berau will trigger a mandatory offer to Berau’s minority shareholders at the same price of Rp540 per share. As the Bakrie group's shares in Berau are still locked up following the IPO, the offer will be launched in April next year. Until then, Vallar will hold an indirect economic interest and voting rights in Berau.

The London listing “will enhance our international profile, provide a currency and platform for development in the region and put us in a much stronger position to build on the organic growth that our combined assets already provide,” Indra Bakrie said in the statement.

Indra Bakrie will become chairman of Vallar, while Nat Rothschild will be co-chairman. Julian Horn-Smith will be appointed deputy chairman. Ari Hudaya, who is president director of Bumi Resources, will become CEO of the London-listed firm. James Campbell, who co-founded Vallar with Nat Rothschild, will become director of business development and strategy. Vallar's existing board representatives will retain their seats, but the Bakries will appoint a chief financial officer.

 “A London-listed, large-scale, pure-play Indonesian coal [producer] should offer a unique commodity exposure and have strong investment appeal,” analysts commented after the deal. And presumably this is part of the attraction for the Bakries. The backdoor listing of Berau and Bumi is being done at an enterprise value-to-Ebitda multiple of around 6.7 times, based on earnings for the 12 months to June 2010, said sources close to the deal.

Regulatory risks are not expected to be an issue for this deal, said a source. But Vallar is savvy enough to know that deals in emerging markets are fraught with completion risk and presumably it wants to safeguard itself against such risks and hedge the opportunity loss of locking up its capital in a deal that cannot close until next year. Vallar has also negotiated a $150 million break fee, payable by the Bakrie Group, if the deal fails to close. Of this, $100 million has already been paid into an escrow account with J.P. Morgan Chase.

The deal brings together the same advisers who worked with Vallar on its IPO earlier this year. Credit Suisse, which is well known for its strong Indonesia franchise, is working with the Bakrie brothers and Recapital. Helman Sitohang, Credit Suisse’s co-head of investment banking for Asia-Pacific and a seasoned Indonesia hand, is said to have been personally involved in negotiations. The Swiss bank initially worked with Berau to sell a minority stake in the company to a strategic investor, which attracted 13 serious bidders, said a source close to the deal. That process eventually morphed into the current deal, added the source. Credit Suisse and Deutsche Bank also arranged a high-yield bond for Berau in July this year, which is widely credited with having reopened Asia's high-yield market.

J.P. Morgan Cazenove is working with Vallar, with London City banker Ian Hannam’s name bandied about as being instrumental in putting the deal together.

¬ Haymarket Media Limited. All rights reserved.
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