Back to square one
No one trying to maximize shareholder value at Bumi Plc would want to start from here. Financier Nat Rothschild’s bid to create an emerging markets coal champion has been a disaster, thanks to clashes with the group’s backers in Indonesia. Now the country’s powerful Bakrie family says it is willing to exit the venture in return for a stake in coal assets they sold to Bumi last year. It’s fiddly and humiliating, but it’s probably a good deal for Bumi Plc’s shareholders.
The politically connected Bakries have offered to cancel their 24 percent holding in the London-listed group in return for a 10.3 percent equal-value stake in Bumi Resources, a big coal exporter at the centre of recent allegations about financial “irregularities”. They’ve offered to buy the Plc’s remaining 19 percent interest in the Jakarta-listed group for $278 million in cash by Dec. 25. The deal envisions them paying about $950 million for Bumi’s 85 percent stake in a second Indonesian coal producer, Berau Energy at a later date.
Bumi would be left with $1.2 billion in cash, but no operating assets, if the whole transaction proceeds. That’s almost double the battered Plc’s market cap before news of the Bakrie offer surfaced. On a narrow view, that seems automatically worthy of a recommendation. The market isn’t pricing in delivery of the offer in full, pushing the shares up 33 percent.
One snag is that it’s unclear how the already heavily indebted Bakries could afford a near $1 bln cash bid for Berau. But crucially, the various parts of the deal aren’t linked. Bumi could just stop at the first stage, which would end the troubled relationship with the Bakries. Stop at stage two, and the rump would be free of another millstone – a non-controlling interest in a Jakarta-listed miner with governance problems. That would leave the Plc focused on the smaller but less indebted Berau, with almost $300 million in cash to pursue acquisitions or hand back to shareholders.
As a salvage operation, it’s potentially attractive. But, spread across the lower share count, the value to Bumi’s remaining investors would still only be worth about 40 percent of the original cash shell’s 10 pound float price if the whole offer proceeds. Even if Bumi holds onto the more attractive assets and benefits from rising coal prices, it’ll have been a shipwreck.