News of ‘irregularities’ in Bumi’s Indonesian operations drove shares down to 148p from the issue price of £10
Remember Nat Rothschild’s confident boast to the Financial Times in January last year about the riches in prospect for backers of his big Indonesian coal deal? “I wanted to do a transaction sufficiently large so that the shareholders of Vallar have a platform on which to go and build a company which is an FTSE 100 entrant. We will be,” said Rothschild.
No, you won’t be. Monday’s news – an investigation into “potential financial and other irregularities in the company’s Indonesian operations” – took shares in Bumi plc, the renamed Vallar, down by almost a quarter to 148p, at which level the company is worth a miserable £300m. The price compares to the £10-a-pop at which Rothschild issued shares to raise £707m in the summer of 2010.
The theory in those days was that Rothschild and a collection of great and good British non-executive directors would impose London-style standards of boardroom governance on assets from emerging markets – in the first instance coalmines from the powerful Bakrie family’s Indonesian empire.
Nice idea, but it didn’t take long for two fundamental flaws to be exposed. First, it’s hard to throw your weight around when you’ve got only a 29% holding, which is the size of Bumi plc’s stake in Bumi Resources, the heavily indebted Jakarta-listed coal group. Second, the complicated finances of the Bakrie family, Rothschild’s partner in the adventure, seemed to rely on coal prices staying high.
When the price of coal started to fall last year the original shareholding arrangements unravelled at speed as Samin Tan, another Indonesian businessman, bought half the Bakries’ 47% stake in Bumi plc.
The net result was that Rothschild himself, after calling for a “radical cleaning up” of Bumi Resources and a faster repayment of debts, was relegated from co-chairman of Bumi plc to join the likes of Lord Renwick and Sir Julian Horn-Smith in the ranks of ordinary non-executive directors. But Bumi Resources’ towering debts, estimated to be about $4bn (£2.5bn), remain as troublesome as ever.
Now comes the real shocker – the allegations, via a whistleblower, of dishonesty. The backdrop here is Bumi Resources’ $800m of investments in non-coal projects, including oil in Yemen.
Bumi plc wrote off the value of its share of most of those stakes in last year’s accounts. But “potential irregularities,” to be investigated by a firm of independent lawyers, obviously raise the question of whether Vallar/Bumi did sufficient due diligence in the first place. After all, most of the investments pre-date last year’s all-share deal to buy the stake in Bumi Resources.
If irregularities are confirmed, expect to hear the UK board members argue that extensive checks were made at the outset and that they were, in any case, dealing with a large listed company in Jakarta subject to its own auditing process from the international firm of Mazars. Well, we’ll see how solid that argument looks when the investigation is complete.
None of this would matter so much if the only losers were the likes of Nat Rothschild and his wealthy friends. But other victims in Bumi’s sorry tale include everyday savers whose money is invested in pension funds that track stock market indices. Bumi, thankfully, never made it to the FTSE 100, where the big tracker money kicks in, but it is a member of the Mid 250 index and the All-Share index, both of which also attract tracker funds. That means London’s reputation as a financial centre is affected.
It is surely now time to call a halt to the rush to London of foreign natural resources companies with sub-par governance arrangements and complicated shareholding structures – or, at least, exclude such companies from indices.
What the Bumi tale has exposed is that the supposed comforts for outside investors often mean little. Bumi was founded by a member of a dynamic financial dynasty, has famous directors and was advised by the pukka investment banking outfit JP Morgan. Yet original backers are sitting on a 85% loss in about 18 months because of factors that extend well beyond the decline in the price of coal.
Mind you, special condemnation should be reserved for the subscribers to Vallar’s fund-raising in 2010. They were putting money into nothing more than a cash shell on the promise-cum-expectation that Rothschild would find a lucrative deal; at that stage, Indonesian coalmines hadn’t even been identified as a potential target. That’s not investment – it’s just punting blindly.
Of course, subscribers to private equity funds play a similar game. But there are two critical differences. First, in private equity you get a range of investments, not just one colossal bet. Second, ordinary investors are not affected when the inevitable disasters occur.
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