Bumi Plc - a Clash of Dynasties

Bumi PLC:

A Clash of Dynasties

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Case Overview

Bumi PLC is a listed coal mining company founded by the Indonesian Bakrie family and UK financier Nathaniel Rothschild. In 2012, an internal conflict between the Bakries and Rothschild made the news. It was reported that the latter had written a letter to the Bakries demanding a “radical cleanup” in the corporate governance of Bumi Resources. Later that year, US$200 million worth of funds were discovered to be missing1. The objective of this case is to allow a discussion of corporate governance issues such as those in joint ventures and reverse takeovers, cross-border listings and companies with controlling shareholders; cultural differences; and regulatory issues.

A Time For Reflection

“I am the first to admit we made a terrible mistake”

– Nat Rothschild, March 2013

Nat Rothschild spoke candidly from his ski chalet in the Swiss Alps as he reflected on the ill-fated relationship he had with his former partner, the Bakries. Just two weeks earlier, he had been resoundingly beaten in a shareholder vote to wrest board control of Bumi PLC back from them. The company he co-founded was in tatters, ravaged by depressed commodity prices, murky financial wrongdoing and boardroom feuds that had become all too public.

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This is the abridged version of a case prepared by Daniel Peck, Royce Ng, Mabel Lee and Wee Shuo Ting under the supervision of Professor Mak Yuen Teen and Dr Vincent Chen Yu-Shen. The case was developed from published sources solely for class discussion and is not intended to serve as illustrations of effective or ineffective management or governance. The interpretations and perspectives in this case are not necessarily those of the organisations named in the case, or any of their directors or employees. This abridged version was edited by Chloe Chua under the supervision of Professor Mak Yuen Teen.

Copyright © 2014 Mak Yuen Teen and CPA Australia.

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Bumi PLC: A Clash of Dynasties

Yet, it was clear that the powerful financier had not admitted defeat. His crusade would go on, just like it had for the last fifteen months. Before heading out to the ski slopes, Rothschild sounded more optimistic already. He mulled, “I’ve had a lot of luck in my life … This time, I got unlucky”2. Introspection, perhaps, had resumed its usual spot in the backseat.

The Honourable Nathaniel Rothschild

The limelight had seldom eluded Nathaniel Rothschild. The scion of one of Europe’s most successful and secretive banking families, Rothschild led a life of wealth that was often shrouded in controversy.

Critics had questioned whether he could live up to his illustrious family name, but Rothschild worked hard to prove them wrong, eventually carving out a name for himself in fund management. After stints at Lazard and Gleacher, he became an equity partner at hedge fund firm Atticus LLC, taking over as co-chairman in 2005. Under his leadership, Atticus grew to manage up to US$20 billion at its 2007 peak, but later disbanded in 2009 after the global financial crisis3.

Unhappy with the lack of recognition accorded to him, Rothschild embarked on his boldest venture yet. In July 2010, he floated a £707m cash shell company Vallar plc on the London Stock Exchange4, promising shareholders that he would invest the IPO funds in emerging market natural resource assets5.

Western-style corporate governance standards6 coupled with lucrative mining resources that were in high demand in the world’s largest engines of growth appealed to investors. By installing a strong board of directors and reputable managers, and adhering strictly to corporate governance codes7, the risk that usually afflicted emerging market assets was greatly reduced. Investors responded favourably, oversubscribing the IPO at £10 per share. Rothschild himself made a £100 million investment8.

The Birth Of Bumi PLC

“If you know them, or you get to actually talk to people who have done business with them, in my experience, the view of the Bakries is universally good.”

– Nat Rothschild, December 2010

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The Vallar board was chaired by Sir Julian-Horn-Smith and Rothschild was a director. Their search for targets did not take long. In October 2010, investment banker Ian Hannam recommended Indonesian coal miner PT Bumi Resources (‘PT Bumi’) to Rothschild as “the best deal he ever saw”9. PT Bumi was Indonesia’s largest coal producer and was under the control of the wealthy and powerful Bakrie family10.

Rothschild acted swiftly upon Hannam’s advice. Within three weeks, he met up with Nirwan Bakrie to discuss a potential deal. Three weeks after, on 16 November 2010, Vallar announced a massive US$3 billion cash-and-share deal to acquire 25% in PT Bumi from the Bakries and 75% of PT Berau Coal Energy (‘Berau’) from businessman Rosan Roeslani11. These percentages would swell up to 29.2% and 84.7% respectively through additional acquisitions and a mandatory cash offer for Berau12. The completion of the deal in June 2011 led the company to become one of the world’s largest exporters of thermal coal and the company was rebranded as Bumi plc (‘Bumi’).

Power Resides With The Few

The injection of PT Bumi and Berau assets into Vallar was a reverse takeover. This, along with the issue of nearly 16.1 million bonus shares to Rothschild, resulted in new shareholding structures and substantial shareholders (Table 1).