Analysis on Bumi Plc: Fall of the Dynasty

CORPORATE GOVERNANCE PAPER

“BUMI PLC: FALL OF THE DYNASTY”

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        Written by:

                        Bella Nathania                                00000006520

                        Cicilia Melinda Wijaya                00000007280

                        Heidy Natalia Kindy                        00000004807

Pelita Harapan University

Business School – Accounting

Tangerang, Karawaci

2016

Contents

Executive Summary        

Problem Statement        

Data Analysis        

Key Decision Criteria        

Pros and Cons Of Reverse Takeover For Shareholders        

Should Rothschild have been responsible for conducting due diligence on the two Indonesian companies before the formation of Bumi PLC        

Key Corporate Governance Issues In A Joint Venture Like Bumi PLC        

Reason behind the failing implementation of Western-styled corporate governance in Bumi PLC        

Reason of the fall in Bumi PLC stock prices.        

Alternatives to solve the case        

Recommendation        

Executive Summary

PT Bumi or Bumi Public Limited Company, now known as Asia Resource Minerals plc. (ARMS), was founded in July 2010 and considered as Indonesia’s largest coal producer controlled by Bakrie family. In November 2010, The Vallar announced a massive US$3billion cash-and-share deal to acquire 25% PT Bumi and 75% of PT Berau Coal Energy from businessman Rosan Roeslani. These percentages swell up to 29.2% and 84.7% respectively through additional acquisitions and a mandatory cash offer for Berau. Since the acquisition, PT Bumi became one of the world’s largest exporters of thermal coal and the company was rebranded as Bumi plc.

Nathaniel Rothschild, the scion of Europe’s most successful and secretive banking families and the director of the Vallar, was the one who initiated the acquisition between the two companies. Not long after the acquisition, the business ties did not work as he planned to be. The injection of PT Bumi and Berau asset into Vallar was a reverse takeover. Bakries held 47.6% of the share capital through their companies PT Bakrie and Brothers Tbk. and Long Haul Holdings. This condition left Rothschild with only 2.4% stake with 3.66% of voting rights and later boosted to 11.7% through the exchange of bonus shares. Things getting worse in late 2011 to 2012 as this reverse takeover significantly changed Bumi’s board composition. Indra Bakrie and Rothschild took over as Co-chairmen of the board, in which the makeup of the board was heavily influenced by the Bakries. Not only that, it was public knowledge that the heavily leveraged Bakries had pledged all their Bumi shares for a US$1.345 billion credit facility from Credit Suisse AG. The repayment deadline was getting near but the Bakries still did not have solution. On November 2011, a new party joined the problematic circle that was Samin Tan. He agreed to purchase half of the Bakries’ shares.

As things getting out of hand, Nathaniel Rothschild declared a “war”. He stated his disappointment to the public that Bumi plc. Needed a clean-up of the corporate governance and balance sheet, suggesting that the company was over leveraged because it had extended to many loans out to connected parties. This declaration of war caused irreparable damage to Rothschild relationship with the Bakries. The Bakries and Samin tan sought to remove Rothschild from the board. In March 2012, Rothschiled agreed to step down as Co-Chairman.

         Bumi was experiencing great downfall after the declaration of war and in late 2012 the Bakries proposed to separate themselves from Bumi by cancelling their shares and buying out the company’s stakes in PT Bumi and Berau in a deal worth 430 pence per share. Ever since the downfall, things were still complicated as the Bakries bought back the share and unending problems kept arising.

Problem Statement

Here are some short general explanations regarding Bumi plc case, further explanation will be stated on Data Analysis section. Based on the case given, there are few questions to be answered:

1. What appears to be the problems here?
2. How do this become a problem?
3. What are the immediate issues that need to be addressed?
4. Differentiate between importance and urgency for the issues identified.

Data Analysis

From the executive summary, we can see that Bumi does not have good corporate governance. This condition leads to a miserable internal company condition. From Nathaniel Rothschild’s declaration of “war”, we can get a glimpse of what is really going on inside the company. He said that PT Bumi had had more than US$550 million in loan receivables that seemed unrelated to its coal business, raising questions about the transactions and connected parties. Having loan receivables that are unrelated to its coal business needs extra attention of the financial officer because the company’s money is being used by something unrelated to the company’s needs. This could be because some parties within the company are using the money for their personal needs or their other business. This condition is not healthy to the company because the company would ran out of money to be reinvested or used for the development.

Other than that, PT Bumi had US$394 million in unspecified business development assets on its books. The amount recorded as business development assets is illogical because the company keeps experiencing loss and shows no development in the operation. This means that the US$394 million in the book doesn’t affect anything to the company. The money is gone and is only recorded as business development assets. From these conditions, we can conclude that PT Bumi does not have a good financial control and does not even aware of where all the money goes.