How Nat Rothschild’s attempts to improve corporate governance in emerging markets (and so achieve much higher valuations) met with the Bakries’ narrow goal of shoring up the ailing financial position of their businesses. An ACG case study in the need for awareness and congruence of goals.
A clash of goals where ethics didn’t win
“Bumi Resources, the Bakries and the term ‘good governance’ shouldn’t be used in the same sentence.”
The idea: changing an ethical culture
In 2010, Nat Rothschild, son of Lord Jacob Rothschild the successful financier, and scion of the famous banking family, created a cash shell called Vallar plc which raised just over £700m in an IPO on the London Stock Exchange.
His aim was to invest in resource companies in emerging markets with the understood goal of changing the low ratings given to them by improving their governance and having this recognised in the UK stock market, hence earning the investments an improved rating and thus a significantly higher valuation. His launch investors, who included such notables as BlackRock, clearly bought into the idea of emerging market stocks with UK levels of governance.
Within a few months, Mr Rothschild had agreed a deal with one of the
leading Indonesian families, the Bakries, which, amongst its many interests had a big stake in coal mining and a major export market in China.
Mr Rothschild should, perhaps have been a little more cautious, since a member of the secretariat at the Asian Corporate Governance Association, was quoted as saying that “Bumi Resources, the Bakries and the term ‘good governance’ shouldn’t be used in the same sentence. This is a company and a group that time and time again has proven that it doesn’t really understand the concept, and chooses not to practise it.”
The opportunity
The Bakries were short of money and had their own goal – to put their business on a sounder financial footing. They were therefore attracted to the deal which had a significant cash element. So, by early in 2011, Vallar had bought a 25% stake in one of the Bakrie Group’s companies, Bumi Resources and a 75% stake in Berau Coal from PT Bukit Mutiara, another company in the Bakrie family, which was indirectly controlled by another Indonesian businessman, Rosan Roeslani. Vallar issued shares as part consideration and by suspending enough of the voting rights, ended up in the situation where Vallar was more than 50% owned by the Indonesians though they technically had voting rights of less than the 29.9% which would have triggered a takeover under LSE rules. The Bakries owned approximately 30% of Vallar and Roeslani owned just over 20%. Later that year, Vallar changed its name to Bumi. At the end of the transactions Vallar/Bumi owned 29% of Bumi Resource and 85% of Berau and the Bakries owned 55% of Vallar/Bumi and Roeslani owned 15%. Rothschild owned just under 4%.
Problems appear early
Bumi’s shares, which had been listed (as Vallar) at £10, rose to £14 in April 2011. But as the year progressed the coal market, which had been suffering a collapse in prices, got worse and coal prices continued to fall. Bumi’s share price started to drop. and the Bakries who had raised a very large loan secured on their Bumi shares, came under financial pressure from Credit Suisse.
By the end of 2011, Mr Rothschild was getting worried about what might be going on in Bumi Resources’ mining business. The Bakries were clearly primarily concerned to sort out the financial position of Bumi Resources and in shuffling round their assets to ease the Bumi Resources situation, they decided they wanted to sell a large part of their stake in Bumi to an Indonesian associate, Samin Tan, and with the cash generated, buy back Bumi’s stake in Bumi Resources. Tan borrowed $1bn from Standard Chartered Bank and Austria’s Raiffeisen Bank International, to pay for the stake and later he became chairman of Bumi. Nat Rothschild must have suspected that cash was being extracted improperly from the business and in due course he identified over $1bn of suspicious transactions. He wrote to the chairman of Bumi Resources and leaked the letter to the Financial Times Newspaper. In early 2012 Bumi actually wrote off a number of its investments because the auditors couldn’t verify their value. By September 2012, Bumi announced that it was looking into potential “irregularities” in its Indonesian operations, and the news hit Bumi’s share price by 25%. It also caused the chairman of Bumi Resources to resign.
Rothschild resigns from the board but then attempts to take control
A month later Nat Rothschild resigned from the board, citing his unhappiness at plans for the Bakries to take control of some of the mines owned by Bumi. In December, the UK Takeover Panel decided that the links between the Bakries and the chairman Samin Tan and his interests constituted a “concert party”, which would normally require them to make a bid for Bumi, but it stayed its hand in enforcing action. A subsequent appeal by the Bakries and Tan was dismissed out of hand by the Panel and Rosan Roeslani left the board.
Mr Rothschild then called an EGM with the intention of sacking most of the board and re-taking control of Bumi. He thought he had lined up enough support from friendly shareholders to be confident of winning the vote.
Then in February 2013, Bumi announced that it had agreed to divest the stake in Bumi Resources and end the ties with the Bakries. And when the EGM vote came, the Indonesians turned the tables on Nat Rothschild when Roeslani sold part of his stake to other Indonesian investors, thereby freeing up enough of the suspended votes to cause Rothschild to lose to the Indonesian shareholders. Rothschild was not even voted back on to the board, at least partly because he wanted to stop the disposal of its minority interest in Bumi Resources, which the majority of shareholders now regarded as the right way forward.
Now the accounting irregularities appear
While this was going on, the legal team looking into the irregularities effectively abandoned its investigation, saying that it couldn’t prove anything wrong had happened since it had been denied access to key papers..
By Spring 2013, Bumi was having to delay the publication of its results due to accounting problems in its Berau subsidiary and a refusal by auditor PwC to sign off the accounts. The shares had to be temporarily suspended at this point. The recently appointed CEO of Bumi, Nick von Schirnding, sacked most of the Berau finance team and appointed Ernst & Young to investigate contracts agreed by Rosan Roeslani, former boss of Berau Coal, and erstwhile director of Bumi. At this point, Mr Rothschild demanded the resignation ofchairman Tan. By this time the share price was reduced to not much over 20% of the flotation price and over $1bn appeared to have vanished from the companies Bumi had invested in.
Eventually Bumi announced that it had found over $200m of spending “with no clear business purpose” at its Berau subsidiary and it was taking action to recover more than $170m from Rosan Roeslani.Bumi wants to undo the deal
By mid-2013, Bumi was talking about getting out of Bumi Resources altogether and cutting the ties with the Bakries. The management portrayed this strategy as allowing it to focus on the Berau asset which it still controlled (in principle anyway), cleaning up the balance sheet, improving efficiency and also governance. In the process, it held out the possibility of returning as much as $400m of capital to the beleaguered Bumi shareholders. This would, of course, also remove them from any further involvement in the huge Bumi Resources coal assets – one of the main justifications for Vallar’s initial involvement in Indonesia. The plan was to complete the separation by the end of the year.
“Bumi fell prey to an extraordinary level of corporate mismanagement that none of us had imagined would be possible”
In the event, a meeting was held in December 2013 which approved the plan to separate Bumi plc from Bumi Resources and the Bakrie Group, and at the same time changed the name of Bumi plc to Asia Resource Minerals. At this point, the ARM board reiterated its intention to return $400m to shareholders, but didn’t give a timescale. Nat Rothschild and other shareholders were calling for rather more of the $500m the deal had produced. Mr Rothschild was quoted as saying “Bumi fell prey to an extraordinary level of corporate mismanagement that none of us had imagined would be possible”.
In the event, shareholders got a $465m special dividend payout.
Separation doesn’t solve the problems
However, within six months Samin Tan had used his controlling interest to vote off the board the newly appointed chairman and the senior independent director. The suspicion was that, in anticipation of a forthcoming meeting of Berau, ARM’s only remaining asset, Mr Tan wanted to install his own candidate on the Berau board with the majority backing of his supporters on the ARM board, and thus achieve de facto control of Berau. At this stage the ARM shares were down to £1.64.
By the middle of 2014, the ARM CEO also left the company when he crossed swords with Mr Tan who disagreed with his plan to invest money in overseas expansion, and with Mr Rothschild who had always been critical of him and wanted him to return cash to shareholders. ARM then appointed an Indonesian CEO.
In October, Samin Tan lost control of ARM when he had to hand over half his stake to the Austrian Raiffeisen Bank International which cited the terms of the $224m loan which, with Standard Bank, had co-funded his purchase of the Bumi shares from the Bakries. Mr Tan was left with a 24% stake held through his Borneo Lumbing company and one of his representative directors then left the ARM board. ARM then had to rethink the refinancing of a $450m bond issued by Berau and due to be repaid in mid 2015 since the Austrian bank now had half Tan’s shares. By now, the shares had fallen 65% from the start of the year.
Mr Rothschild pledged to underwrite a rights issue, despite ARMS having handed out $465m to investors only five months earlier. The markets were saying Berau would have difficulty refinancing the debt in current conditions and with the governance problems at ARM.
Samin Tan tries to regain control
By late December 2014, Mr Tan was trying to re-establish control by calling an EGM to get new directors, constituting a majority, appointed as nominees of his Borneo company. His original stake, purchased for $1bn had been reduced to £25m before he parted with half to the Austrian bank.
At the end of the year, things appeared to pick up slightly when a Singapore court found in favour of ARM in its action against Mr Roeslani and ordered him to pay back $173m plus interest and costs. This would be a big boost to a company that was worth as little as £8m at one point and by the end of 2014 had a market cap of £12m. Though it wasn’t clear how easy it would be to extract the money from Mr Roeslani.
This took the shares up to 15.5p, but within a week, the chairman, who had been appointed by Mr Tan, resigned and the shares dropped to 8.75p, and a market capitalisation of £22m, meaning that they had lost 80% of their value since October 2014. The chairman had opposed Mr Tan’s plans and the ARM board warned that he might direct its resources to help out his own personal interests. The board turned down Mr Tan’s proposals saying that his manoeuvres were jeopardising their efforts to refinance the $450m bond due later in the year and also a further $500m bond due in 2017. Nat Rothschild expressed his support for the board’s stance.
Now Nat Rothschild seeks control
By February 2015, Mr Rothschild had put on the table an offer to underwrite a $100m equity injection at 25p, representing a 79% premium to the opening price on the day and with the condition that the $950m of loans due by Berau be extended. If he took the whole of the new issue, he would increase his current 17% holding into control of ARM. This offer was supported by the new chairman. However, in April, just before the meeting to vote on Mr Rothschild’s bid, one shareholder, an Asian investor, Argyle Street Management, announced its intention to put forward an alternative offer. This would be an amount of up to $150m and a promise to reduce the company’s net debt, through a vehicle called Asia Coal Energy (ACE) and with the backing of the wealthy Indonesian Widjaja family, through their Sinarmas Group.
Mr Rothschild postponed the shareholder vote and came back with an outline improved offer, backed by a Russian oligarch and his coal group. This bid was dismissed by Argyle Street as an opportunistic attempt to get control of A.R.M. which “would not address the issue of a local partnership which (ACE) considers to be essential to a successful outcome for all Asia Resource shareholders, including bondholders, employees and the wider local economy”
The locals defeat the western invaders
In mid-May Nat Rothschild withdrew his offer while keeping his recapitalisation plan on the table, leaving ACE in pole position as the sole bidder, but Asia Resource Minerals had one more trick to play before the game ended. The former CEO of A.R.M. and Berau, its coal mining subsidiary, who had resigned in March after being challenged by the UK’s Financial Conduct Authority over breaches of rules and was now being sued by A.R.M., took his own retaliatory action against ARM, accusing them of engineering his removal. He locked himself in Berau’s offices, surrounding himself with security staff and refused admission to A.R.M.’s senior officers.
With A.R.M.’s shares suspended in May as the company admitted it didn’t really know what was going on at its main operating subsidiary, Berau, the initiative slid inexorably towards the Indonesians.
In June the FCA (rather belatedly) fined A.R.M. £4.6m for having inadequate systems and controls to comply with its obligations as a listed company and breaching various listing rules.
At the end of June the board of A.R.M. approved the takeover from Asia Coal Energy Ventures, and Nat Rothschild abandoned his bid, saying that he would never again invest in “ungovernable” Indonesia.
On 13 August 2015, following the closing of its offer, Asia Coal Energy Ventures announced that the ordinary shares of A.R.M. had been cancelled from trading on the main market of the London Stock Exchange and from listing on the Official List. And that was the end of Mr Rothschild’s dream of owning an emerging market commodity asset with a UK level of corporate governance.
It was the failure of an attempt to impose his own ideas of corporate governance on a business run by powerful families in a rather different culture. And in the process, his investors in Vallar lost an awful lot of money and went through a shambolic few years.
The outside observer would conclude that he and his investors have been taken for a very expensive ride and they and their money have been used by very experienced players operating in an environment where the external investors simply didn’t understand the rules (or at least the way things were done). They certainly weren’t plugged into the private negotiations where the real decisions were made.
So, in a clash of goals, the locals’ need for cash beat the outsider’s goal of changing governance hands down.
Related:
- Towards a common goal: the Second Golden Rule of Corporate Governance
- Losing sight of a common goal: a fictional case study (based on real life) on the need for clear goals
- Corporate Governance Best Practice: ACG’s Five Golden Rules
