SINGAPORE/LONDON (Reuters) - Indonesia’s powerful Bakrie family has proposed a parting of ways with financier Nat Rothschild and Bumi Plc, the London-listed coal conglomerate they co-founded two years ago, after frayed tempers over allegations of financial irregularity.
The proposal by the Bakries to take back their Indonesian assets from Bumi Plc - which could cost the family about $1.1 billion - was made to Rothschild and other directors of the company on Wednesday night, on the eve of a board meeting in Singapore, sources said.
The last straw might have been an announcement by the London group in September of a probe into potential wrongdoing at its Indonesian coal mining operations, including PT Bumi Resources, the jewel in the Bakrie crown.
“For the Bakries, they will do anything to defend Bumi Resources,” said a Bakrie insider who was aware of the proposal.
Details in a statement from Bumi Plc outline a separation that would eventually leave the London firm, whose shares have tumbled since its re-listing last year, without operating assets, and back at square one as an investment shell.
Bumi Plc said in a statement it was considering the proposal. Details on financing arrangements were not disclosed.
People close to the deal said the Bakries were preparing to borrow up to half the amount required for the deal, possibly through financing arranged by Credit Suisse.
Bumi Plc shares were up 18 percent at 2.19 pounds in volatile trade after the proposal, but it was far from the 11.65 pounds it traded at in July last year.
In Jakarta, shares in PT Bumi Resources were up about 4.4 percent.
Under the proposal, the Bakrie family would cancel their indirect stake in the London-listed group, around 23.8 percent. In exchange, they would get 10.3 percent of PT Bumi, out of a stake of just over 29 percent currently held by the London firm. The Bakries would then buy the remaining 18.9 percent of shares for cash, before Christmas 2012.
The Bakries have also made a conditional proposal to buy out Bumi Plc’s 84.7 percent stake in PT Berau Coal Energy, an associated Indonesian coal miner, within the next six months. Berau shares were up over 15 percent after the news.
A spokesman for the Rothschilds declined comment.
But if the proposal is accepted, indications were the deal would leave Rothschild and other Bumi Plc shareholders taking a severe hit on their investment.
”Yes, it is an acknowledgement (of defeat),“ said one source close to the situation. ”But the board spoke to people in Indonesia and realized (given the extent of Bakrie influence in coal-producing regions that) it would never be feasible to exercise full control (over Indonesian assets).
“And if you can’t live with the Bakries, there is no future for the combined business. No one would want to start from here, but given where we are, this is far from being the worst option.”
The London brokerage Numis said it might be time for the shareholders to cut losses and move on.
“Valuation aside, this looks like good news for Bumi Plc, in our view, as it could walk away with its reputation intact and some cash in the bank. Losing its main assets would be a disappointment but given the soggy coal markets and dark cloud surrounding the company, this might be a good way to move on.”
The board directors gathered in Singapore included Rothschild, Indra Bakrie, one of the Bakrie brothers, and Samin Tan, an Indonesian billionaire who pulled the Bakries back from default last year with a $1 billion investment, only to watch the value of his shares crumble.
The Bakries and Tan each hold half of a 47.6 percent stake in Bumi Plc, while Rothschild owns 12 percent.
The relationship between Rothschild and the Bakries, one of Indonesia’s most powerful and politically connected families, has soured since the London group’s inception, particularly after a leaked letter from the financier last November that called for a “radical clean-up” in PT Bumi.
The letter was seen as a sign of his frustration with the Bakrie family, whose patriarch Aburizal Bakrie is an Indonesian presidential candidate.
Tan and the Bakries pushed out Rothschild as co-chairman in March and Tan became chairman.
But relations have also frayed between the Bakries and Tan. Sources have said Tan is “furious” with the Bakries after watching the value of his investment plunge.
There was no immediate word on the Bakrie proposal from Tan.
But a source close to the Bakrie family said: “This is a clear message of separation with Tan. We do not live in the same culture.”
Bumi Plc’s statement on Thursday gave no update on the probe into irregularities, being led by a London law firm and still in progress. The investigation had revived worries over governance at Bumi Plc and concerns over the woes of its debt-burdened affiliate, Bumi Resources.
Most of the allegations of financial irregularity, expected to total more than $500 million, relate to Bumi Resources, the flagship Bakrie miner and Indonesia’s largest coal producer. Two of three investments at the center of the probe, though, have already been written down to zero by the London parent.
“While we are not able to quantify the amounts involved in these irregularities, we believe this investigation may reinforce the idea that the company needs to address its complex corporate structure,” analysts at JP Morgan, the bank that fostered the creation of Bumi, said in a note last month.
Bumi was listed in London last year via a reverse takeover engineered by Rothschild that aimed to create an international coal-mining powerhouse with operations in Indonesian Borneo, and one of the biggest listed companies on the London exchange.
The deal highlighted the promise of Indonesia, Southeast Asia’s biggest economy, which boasts some of the world’s largest deposits of coal, gold, copper, tin and natural gas, spread across an archipelago of 17,000 islands.
But it also highlights risks of investing in a nation where corporate governance can be spotty, and powerful local conglomerates able to use local connections to protect their interests.
Additional reporting by Saeed Azhar; Editing by Raju Gopalakrishnan