Nat Rothschild’s reputation is on the line as his fight with the miner’s Indonesian backers enters its endgame.
Nowadays, Nat Rothschild would choke on almost every word. It is April 2011 and the billionaire financier is giving a speech at the Four Seasons hotel in Jakarta. He sounds cock-a-hoop.
He has just pulled off a $3bn (£1.9bn) deal with Indonesia’s Bakrie family and another prominent local businessman, Rosan Roeslani. Together they have created Bumi (Other OTC: VLLRF - news) , the London-listed Indonesian coal miner.
“Mr Ambassador, my partners the Bakrie family, Rosan Roeslani”, begins Rothschild, hesitating only to praise the “beautiful hall with beautiful decoration”. He explains how in July 2010 he “set out to find a business to acquire or to merge with”, before declaring: “Never in my wildest dreams did I think that such a perfect opportunity would arise.”
He pauses. “The reason why we were able to consummate the transaction so quickly is entirely due to the way in which the Bakrie family Indra (Madrid: IDR.MC - news) , Nirwan and his brother Aburizal approached this,” he says, praising their “incredibly good judgment, honour throughout, decency, reasonableness and extreme entrepreneurialism.” Roeslani, meanwhile, “never ceases to impress”.
Less than two years on, his speech sounds pure comedy. Rothschild and the Bakries are at daggers drawn, consumed by a mutual loathing. Relations between the financier and Roeslani are on a similar footing. And the company they created is now a war zone. The shares have collapsed by more than 60pc. And there have been claims and counter-claims of lies, theft and email hacking.
On Thursday comes the showdown. Bumi will hold an extraordinary general meeting (EGM) at the Honourable Artillery Company in the City of London (LSE: CIN.L - news) . The meeting has been called by Rothschild, who now holds 18.2pc of the votes.
His aim? To oust 12 of Bumi’s 14 directors including chairman Samin Tan and chief executive Nick von Schirnding and install his own management team. Such a wholesale sacking is virtually unprecedented in the London market, though rebel investors at the
Anglo-French Eurotunnel did perform a mass guillotining in April 2004.
The story of how Bumi became one of the biggest stock market float fiascos London has ever seen is one of a breakdown of trust brought to a head by a falling coal price, the Bakries’ labyrinthine financial affairs and a scandal over at least $1bn of missing funds from Bumi’s Indonesian assets.
But overlaying that is a clash of styles, both personal and cultural, that has pitted the driven, confrontational Rothschild against Indonesian partners he barely knew. The financier has also turned on a board he helped create, believing it is not only conflicted but asleep at the wheel or worse.
Bumi began life as shell company Vallar the brainchild of Rothschild, the scion of the famous banking family and only son of Jacob, the fourth Baron Rothschild.
Eton and Oxford-educated Nat is no stranger to controversy. He famously found himself embroiled in a convoluted drama in 2008, involving the Corfu-moored yacht of one friend, Russian oligarch Oleg Deripaska, and a meeting where another, Lord Mandelson, was accused of “dripping pure poison” into the ear of George Osborne. The Chancellor then found himself fending off claims he tried to solicit a donation for the Conservative Party from Deripaska.
But Rothschild has a proven money-making knack from his days at hedge fund Atticus and had renounced his playboy lifestyle for that of a teetotal financier.
He listed Vallar in June 2010 and set about raising £707m at £10 a share to buy emerging-market mining assets. His plan was to get them a racy stock-market rating by adding London’s superior corporate governance into the mix.
Rothschild’s team chipped in £100m and also subscribed for £20m of controversial “founder shares”, contingent on them making acquisitions. Rothschild put up 80pc of the money.
The likes of Xstrata (Other OTC: XSRAF - news) and Glencore were also chasing similar assets. But in October that year, Rothschild took a call from Ian Hannam, the former JP Morgan Cazenove banker who had advised on Vallar’s float, though in a junior role to main adviser Credit Suisse (NYSE: CRP - news) . He suggested a deal. In early November (Xetra: A0Z24E - news) , Rothschild flew to Los Angeles to meet Nirwan Bakrie.
In Indonesia, the Bakries are as famous as the Rothschilds are in the UK. Aburizal, the eldest of the brothers, is running for president next year as head of Golkar, the party of former dictator General Suharto. The family owns businesses spanning everything from mining to palm oil to telecoms.
The Bakries are risk-takers, whose debt-fuelled empire-building brought regular flirtations with bankruptcy not least in the Asian financial crisis of 1997. The family was not universally popular after one of their companies’ gas drills in 2007 allegedly caused the biggest ever “mud volcano”. The Bakries offered $750m to settle compensation claims from tens of thousands of East Javanese.
But there is no disputing their power. Rothschild and Nirwan were said to have “got on famously”. Rothschild had told investors any deal would at least involve “a controlling economic interest”.
But the proposed one envisaged Vallar buying 29pc of the Bakrie-controlled Bumi Resources, Indonesia’s biggest coal producer, and 85pc of the fifth largest, Berau Coal, then controlled by Recapital, an investment group headed by Roeslani. Indra Bakrie was to become chairman. This time Credit Suisse was adviser to the Bakries, with whom the bank has had a long relationship.
Even today the mines are considered high-quality assets, with China a major customer. On November 5, Hannam emailed Rothschild. “We have been presenting to you the best opportunity any of us can see in the mining sector worldwide,” he said. For that, JP Morgan requested $60m of fees, some contingent on Bumi joining the FTSE100.
Rothschild’s own Vallar Advisers took on the due diligence, relying on three recent transactions involving Bumi Resources and Berau in which JP Morgan and Credit Suisse had been involved.
By April 2011, the deal was done. The Bakries wound up with 47.6pc of the London-listed Bumi but only 29.9pc of the votes a major bone of contention today.
That was the result of not getting a “whitewash” from the Takeover Panel to allow them to keep the votes without any obligation to make the mandatory takeover offer for a company that comes with crossing the 30pc voting threshold. Meanwhile, Rothschild’s team was poised to pocket the founder shares that converted into a 6.67pc stake.
In the same month that the financier gave his speech in Jakarta, the shares shot to an all-time high of £14. Now they are worth more than £10 less.
Precisely what happened to wreck the investment has now got lost in spin. But, broadly, three things occurred. First (Other OTC: FSTC - news) , the coal price collapsed, whacking earnings. Secondly, the Bakries found themselves so cash-strapped they had to sell half their stake. And third, at least $1bn of financial shenanigans cropped up at Bumi’s Indonesian assets. Who knew what and when is hotly disputed.
As the Bumi prospectus made clear, the Bakries had pledged some of their shares in the group as collateral against a $1.3bn loan from Credit Suisse. As the falling coal price hit Bumi shares, the Bakries faced margin calls on the loan. That exposed something else the leverage in Bumi Resources, which was struggling under $4bn of debt. By the summer of 2011, the Bakries needed cash.
But the arrival of Samin Tan’s Borneo group, which bailed out the Bakries by paying $1bn at £10.90 a share for half their stake, triggered open warfare.
One City source says: “Rothschild spotted his chance to get the Bakries out of the company and take control himself. That’s when he started making a fuss about related-party deals he had previously turned a blind eye to. So he was pretty cross when Samin Tan showed up.”
Rothschild would deny that, pointing to letters and emails from the time, expressing shock at the alleged transfer of Bumi assets to other Bakrie interests something the family denies.
In November 2011, when Tan was negotiating his deal, Rothschild wrote a letter to Bakrie acolyte Ari Hudaya, Bumi’s former chief executive and the head of Bumi Resources and then infuriated his Indonesian partners by leaking it.
While he expressed his “full support” for Tan’s deal, he told Hudaya to get a move on with a “radical cleaning up” of the company’s “balance sheet and corporate culture”, listing a string of related-party transactions.
They included $437m of loans from Bumi Resources to Recapital and its affiliate Bukit Mutiara and $75m invested by Berau in the “Chateau Asean Fund 1” that has never been recovered. Each of those threw a fresh light on 13pc shareholder Roeslani, who late last year was outed by the Takeover Panel to be part of a shareholder concert party with the Bakries and Tan.
All three now have their votes restricted to a 29.9pc block to the advantage of Rothschild at the looming EGM though there could yet be a last-minute twist. The Takeover Panel is investigating whether Rothschild actually knew of Roeslani’s links to the Bakries when he signed the deal.
Emails show that throughout last year Rothschild made countless attempts to get Tan, who became Bumi chairman in March, senior independent director Sir Julian Horn-Smith and audit committee chairman Lord Renwick also a vice chairman of JP Morgan Cazenove to embark on a proper clean-up. But by September, his calls had taken on fresh import.
Bumi told the market it had been passed a whistleblower document, via Rothschild, alleging “potential financial and other irregularities” at its Indonesian assets. The news sent the shares down 25pc in a day. Bumi appointed law firm Macfarlanes to investigate, but the contents of its report were not disclosed to shareholders.
Horn-Smith expressed concern over the “provenance” of the information that Macfarlanes investigated and complained that Rothschild would not disclose the whistleblower’s identity.
The Bakries claimed Rothschild had handed over whistleblower papers that “were apparently stolen or illegally obtained” and then refused to say “where and how he got those documents”. Tan repeated that his emails had been hacked.
Rothschild, who resigned from the board in October, hit back, accusing them of using the Macfarlanes inquiry to “settle personal scores”.
He argued that the whistleblower document was actually “a due diligence report commissioned by Samin Tan before he invested in Bumi” in December 2011. As such, Rothschild maintained, Tan “knew about financial irregularities before he joined the board, yet in his role as chairman did nothing about it”. That allegedly contravened his “legal and fiduciary duties”. Tan’s response is that he was making progress behind the scenes but the “whole whistleblower process brought the recovery of the money to a complete stop”.
On Thursday, shareholders get to decide who should sort out the sorry mess: the incumbent board or Rothschild’s candidates, led by proposed chairman, Australian businessman Wal King, whose name has triggered jokes the whole thing could be rebranded Nat King Coal.
There is another consideration. The board claims only it can deliver the deal that will see the Bakries exit the group, cancelling their shares in Bumi and paying $278m cash in return for the London plc’s stake in Bumi Resources.
That deal looks better as Bumi shares rise, though shareholders also have concerns that Tan has struck an even better one via a “side-deal” with the Bakries. He denies that, while admitting: “Whatever deal we will do with the Bakries, the amount will be far below the losses I have suffered.”
Either way, both King and Rothschild dismiss the board’s claims as bluster, arguing that businessmen as pragmatic as the Bakries will deal with anyone, including them, as long as it is in their interests.
Should it come to that, only one thing is certain: Rothschild’s farewell speech will be a lot less polite.