Bumi PLC: A Clash of Dynasties 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 missing 1 . The objective of this case is to allow a discussion of corporate governance issues such as those in joint ventures and reverse takeovers, crossborder 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. 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 crisis 3. 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 Exchange, promising shareholders that he would invest the IPO funds in emerging market natural resource assets 5. Western-style corporate governance standards 6 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 investment 8. 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 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 lan Hannam recommended Indonesian coal miner PT Bumi Resources ('PT Bumi') to Rothschild as "the best deal he ever saw" m.. PT Bumi was Indonesia's largest coal producer and was under the control of the wealthy and powerful Bakrie family 10. 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 Roeslani" 11. These percentages would swell up to 29.2% and 84.7% respectively through additional acquisitions and a mandatory cash offer for Berau 12. 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). Table 1: Bumi Shareholding Structure at 30 September 2011 Notably, the Bakries now held 47.6% of the share capital of the company through their companies PT Bakrie \& Brothers Tbk. and Long Haul Holdings. Under the UK Takeover Code, the acquisition of 30% or more of the voting rights of a company required a mandatory cash offer for all the company shares. To obtain a waiver, the Bakries agreed to limit their voting power to 29.9%24. Roeslani received 10% of the share capital, which in light of the Bakrie waiver was worth 13.3% of the voting rights in the company. In total, 43.3% of Bumi's voting rights were controlled by Indonesian businessmen. As for Rothschild, the reverse takeover left him with a 2.4% stake with 3.66% of voting rights. However, on 30 September, he exchanged the nearly 16.1 million bonus shares that he had received upon completion of the acquisition for 16,064,608 new Bumi Voting ordinary shares. This boosted his voting power to 11.7%. The shift in power inevitably cast the spotlight on these new key players. The Bakries were a business dynasty steeped in political influence. They were risk-takers 25 who had built their sprawling empire on debt and leverage. The family business was controlled by three brothers and the eldest, Aburizal Bakrie, was a front-runner for the 2014 Indonesian Presidential Election 26. Roeslani controlled a diverse portfolio of businesses under the umbrella of Recapital Group. Though their relationship was unclear, Roeslani and the Bakries had had significant business dealings with each other. At the time of the reverse takeover, Roeslani controlled PT Recapital Asset Management and PT Bukit Mutiara owed PT Bumi US\$231m and US\$251m in outstanding loans 27. Board Games The reverse takeover also significantly changed Bumi's board composition. Indra Bakrie and Rothschild took over as Co-Chairmen of the board. New executive directors were also appointed. PT Bumi President Director Ari Hudaya became Chief Executive Officer (CEO) while PT Bumi Chief Financial Officer (CFO) Andrew Beckham assumed the CFO role. Meanwhile, Roeslani became a non-independent 28, nonexecutive director. The make-up of the board was heavily influenced by the Bakries. On 16 June 2011, the Bakrie Group signed a relationship agreement with Bumi. As long as they controlled 15% of voting rights, they would be entitled to nominate the Chairman, CEO and the CFO of the Bumi board 29. Roeslani's PT Bukit Mutiara had an identical agreement, except it could only appoint one non-executive director. These relationship agreements would become a bone of contention in the ensuing debacle. Samin Tan: The Bakries' White Knight It was public knowledge that the heavily leveraged Bakries had pledged all their Bumi shares for a US\$1.345 billion credit facility from Credit Suisse AG. In October 2011, Bumi warned that the repayment deadline was nearing but the Bakries still did not have a solution 30. Mining tycoon Samin Tan then entered the fray 31. On 1 November 2011, he agreed to purchase half of the Bakries' 47.6% Bumi stake for US\$1 billion through his company PT Borneo Lumbung Energi and Metal ('PT Borneo') 32. He paid an average of 10.91 per share - a stunning 47% premium to Bumi's previous day close. The stake would not be divided, but rather jointly held within Special Purpose Vehicles (SPVs) 33. Investors welcomed the news and Bumi's stock spiked 27% over the next two weeks. Yet, Tan's introduction would have far-reaching implications for the company's future beyond anyone's expectations. Rothschild Declares War "Nat is a very good friend of mine, but he does tend to go straight into the wall head down hoping the wall will break ... You particularly don't do what he did to a bunch of Asian toughies." - Simon Murray, Chairman of Glencore International A mere nine days after Samin Tan's introduction, Rothschild unexpectedly took his grievances public. He leaked a scathing letter addressed to Bumi CEO Ari Hudaya to the Financial Times 34. The letter called for a clean-up of the corporate governance and balance sheet at PT Bumi, suggesting that the company was over-leveraged because it had extended too many loans out to connected parties. He questioned Hudaya's dual role as CEO of Bumi and PT Bumi, and also accused him of not responding to board queries 35. Rothschild's dissatisfaction had probably been brewing for some time. First, PT Bumi had had more than US\$550 million in loan receivables that seemed unrelated to its coal business, raising questions about the transactions and connected parties 36. Second, PT Bumi had USS394 million in unspecified business development assets on its books. Third, prior to refinancing, PT Bumi had maintained all these monetisable assets 37 while paying an exorbitant 19% annual interest rate on US\$600 million in debt to the China Investment Corporation (CIC). Rothschild believed this imprudence was corporate governance-related. Bumi's poor share price performance probably compounded Rothschild's unhappiness. Even after Samin Tan's welcomed intervention, Bumi was still trading at 15.4% below IPO price on the date of Rothschild's letter 38. Despite a good operating performance in the first half of the fiscal year, the share price was overwhelmed by a maelstrom of worrying macroeconomic factors. These included the Eurozone sovereign debt crisis, as well as the peaking and subsequent decline of Indonesian coal prices 39. Rothschild's letter caused irreparable damage to his relationship with the Bakries. Though a new debt collection schedule was agreed, the Bakries and Tan actively sought to remove Rothschild from the board. After they threatened to call an EGM, Rothschild eventually agreed to step down as Co-Chairman on 27 March 2012. He remained as a non-executive director, while Samin Tan assumed Chairmanship. CEO Hudaya and CFO Andrew Beckham were also axed and replaced by Nalin Rathod and Scott Merrillees respectively 40. Financial Irregularity, Share Price Calamity Bumi's FY2011 results were mixed. Despite a US $280 million operating profit, finance costs and tax expenses had pushed the company into an overall loss of US\$282 million. Other troubling questions had also arisen. In August 2011"1, Bumi wrote off all US $390 million 42 of PT Bumi's exploration assets. The 2011 Annual Report released in early 2012 also revealed that the company had written off US\$247 million 43 and US $75 million 44 of PT Bumi's and Berau's business development funds respectively. On 24 September 2012, the company announced that it had become aware of "potential financial and other irregularities" at its Indonesian operations 45 and commissioned law firm Macfarlanes LLP to conduct an independent investigation 48. It was a crushing blow for the company, which had already been struggling under the weight of collapsing coal prices. That day, share price fell 23% to an all-time low of 147.6 pence, 85% below IPO price. The Bakries Offer A Way Out Not long after, on 11 October 2012, the Bakries boldly proposed to separate themselves from Bumi by cancelling their shares and buying out the company's stakes in PT Bumi and Berau 47 in a deal worth 430 pence per share 48. The proposal was conditional on Rothschild returning the 16.1 million bonus shares he had received. Rothschild resigned from the board four days later 49. Rothschild publicly criticised the board, insisting that the proposal had short-changed minority shareholders. He also alleged that Samin Tan had had a side-deal with the Bakries to be reimbursed at his original buying price of 10.91 per share. Tan's lieutenant Alexander Ramlie did not deny these claims, arguing that Tan would not have dissolved the jointly-held SPVs if he had not been compensated 50. Bumi's independent directors were put on the spot. Senior Independent Director Sir Julian Horn-Smith rebutted Rothschild's accusations, labelling Rothschild an "activist investor"51. Horn-Smith insisted that the board was evaluating the proposal carefully and their priority was to remove the Bakries from the company at a valueadding price. The entire board seemed united over the need for a separation from the Bakries. Eventually, the company rejected the Berau stake sale but remained in discussions to exit PT Bumi. Concert Parties And Musical Chairs December 2012 saw the exodus of several board members. Five days before the Macfarlenes' findings were due 52, Co-Chairman Indra Bakrie resigned, followed by CEO Rathod. Samin Tan was left as sole board Chairman while Head of Investor Relations Nick von Schirnding was appointed as new CEO. The Takeover Panel 53 then released a significant ruling on 19th December that the Bakrie Group 54 Tan's PT Borneo and Roeslani's PT Bukit Mutiara were technically a concert party, reducing their collective voting rights from 43.3% to 29.9%. This was welcomed news for Rothschild. Subsequently, Roeslani stepped down from the board. Rothschild's Political Crusade Rothschild made his move in January 2013, requisitioning a general meeting to replace 12 of the 14 directors on the board with his own nominees 55. He felt that the existing board lacked independence and had taken too long to deal with Macfarlenes' findings and the Takeover Panel ruling. In the lead-up to the vote, Rothschild and the board would be embroiled in some very public mud-slinging. The main targets of Rothschild's attack were CEO Von Schirnding and the Concert Party trio. He accused Von Schirnding of falsifying his law and accounting qualifications 56. He also revealed that the Macfarlenes investigation revolved around a leaked 57 due diligence report commissioned by Samin Tan prior to his Bumi share purchase. The report suggested that Tan had been aware of the alleged irregularities at PT Bumi and Berau before he joined the board. Rothschild also accused Tan of failing to fulfil his fiduciary duties as a director to deal with these issues. The board and the Concert Parties returned fire. The board dismissed Rothschild's attempt to wrest control, citing the Bakries' relationship agreement with Bumi that ironically had been brokered by Rothschild's own Vallar Advisors LP. The Bakries placed the blame for the Takeover Panel ruling squarely on Rothschild, accusing Vallar Advisors of poor due diligence on whether they constituted a concert party. According to them, Rothschild had benefitted significantly from some US\$15 million in advisory fees paid to Vallar Advisors. Voting alliances were also being forged as the highly-anticipated vote loomed near. Rothschild and his associates had amassed 25.2% of voting rights 58. However, former supporter and 2.2% stakeholder Standard Life 59 threw its support behind the board 60. Proxy advisory firms also weighed in on the issue. The UK's PIRC backed Rothschild's proposal to replace Von Schirnding and advised investors to sack all directors with "conflicts of interest" .. Institutional Shareholder Services (ISS) disagreed with most of Rothschild's proposals, only agreeing that Nalin Rathod, Scott Merrillees and Alexander Ramlie should be removed from the board. Discussion Questions 1. Using Bumi and other examples, discuss the pros and cons of reverse takeovers for shareholders. Should Rothschild have been responsible for conducting due diligence on the two Indonesian companies before the formation of Bumi? 2. What are some of the key corporate governance issues in a joint venture like Bumi plc? 3. Many UK public companies possess a diffused share ownership structure. However, in Bumi, voting power was concentrated with the Concert Party trio, who sat on the Board as well. Discuss how this affects the board's independence and how effectively they can govern. 4. What lessons can be drawn from the case about governance issues in companies with controlling shareholders and multiple substantial shareholders? 5. Rothschild believed that the imposition of Western standards of corporate governance into Bumi plc would make it a very successful company. Why did he fail? 6. What challenges do regulators face in overseeing companies like Bumi plc, where major shareholders, managemenet and operations are based overseas? 7. Discuss the role that activist investors like Nathaniel Rothschild play in the corporate governance of a company. Do you think they are good for the company and minority shareholders