Indonesia's shafted coal deal
By Bill Guerin
JAKARTA - The US$3.2 billion blockbuster coal-industry deal involving Indonesia's biggest business family, its most prominent investment bank and big international lenders lies in tatters - and with it the prospects of the country's struggling energy industry.
Announced this year with great fanfare, the influential Bakrie family's planned divestment in Indonesia's two largest coal mines, PT Kaltim Prima Coal and PT Arutmin Indonesia, was abruptly canceled in late August amid a disagreement concerning
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valuation and payment schedules with the potential buyer.
Held under the Bakrie family's publicly listed PT Bumi Resources, the deal would have earned the company a windfall profit of more than $2.5 billion and would have represented the country's second-largest corporate acquisition ever - ranking only behind last year's $4.6 billion sale of local cigarette maker Sampoerna to US tobacco giant Philip Morris.
The spurned buyer, PT Borneo Lumbung Energi, owned by the local investment bank PT Renaissance Capital, was blamed by Bumi for delaying the sale and backtracking on previously agreed asset valuations. Insiders to the deal, however, point to a lackluster financial performance by PT Arutmin in the second quarter, where a sudden spike in production costs apparently spooked international creditors circling around the deal.
Bumi had twice refused Renaissance entreaties to lower the acquisition price and contended that the glitch in output at the Arutmin mine was due to excessive rainfall. The two companies had initially agreed to complete the transaction by September 30, but Bumi indefinitely canceled the sale after being asked twice for a payment deadline extension.
Last week Bumi confirmed that the sale was officially off because of irreconcilable differences on asset pricing, and later senior Bumi managers said they would put minority stakes in the mines on the market for other interested buyers. Bumi's shares were suspended from trading on the stock exchange after the unanticipated announcement.
The deal's cancellation notably puts Bumi's new strategic vision in abeyance. The company had in filings to the Jakarta Stock Exchange in March indicated that the sale would help finance a strategic move into the alternative-energy business, including possibly coal liquefaction, upgrading brown coal, and big ventures into biofuel production.
The corporate restructuring was to include a merger between Bumi and PT Energi Mega Persada (Energi Mega), a sister company in the Bakrie Group and Indonesia's second-largest energy concern. With the canceled sale, that mega-merger and its expected ramped-up oil and gas exploration activities are also now in doubt. Energi Mega had already announced a $154 million loan from Credit Suisse to finance new oil and gas projects, though it appears now that the energy concern will need all the finances it can muster.
One of its majority-owned units, Lapindo Brantas, has been at the center of a major environmental disaster in East Java, where in late May its natural-gas prospecting activities unleashed torrents of toxic mud that have displaced thousands of villagers and paralyzed regional road traffic. Nine people, including officials from Lapindo and its drilling subcontractor, have been charged under the penal code and environmental laws in a case where compensation estimates range anywhere from $70 million to $300 million.
Sources close to the deal say that Energi Mega had plans to spin off Lapindo Brantas before the merger with Bumi. But even if a buyer could be found, which seems highly unlikely with the legal uncertainty surrounding the company's future, any purchase would factor in the high end of possible legal liabilities.
Bumi's purchase of cash-strapped Energi Mega, in an all-stock deal valued around $1.2 billion, needs the approval of an extraordinary shareholders meeting that has now been postponed for a third time to "some time between November and December", according to Bumi finance director Eddie J Soebari. He said extra time was now needed to evaluate Bumi's assets further after the canceled divestment.
The cancellation of the $3.2 billion deal casts new doubts on Bumi's future and with it the future direction of Indonesia's energy industry.
Bumi, part of the Bakrie Group owned by the family of Coordinating Minister for Welfare Aburizal Bakrie, had emerged strongly from the 1997-98 Asian financial crisis. For instance, the company bought an 80% stake in Arutmin from BHP Billiton for $148.5 million and the remaining 20% from the Bakrie Group for $37 million.
In 2003, it bought Kaltim Prima outright for $500 million from BP Plc and the Rio Tinto Group. If the planned divestment had gone through, Bumi would have made a fourfold profit on the amount it paid for the two mines in just five years.
Bumi recorded total sales of Rp15.92 trillion ($1.63 billion) last year, up significantly from Rp9.42 trillion ($1.05 billion) in 2004. Those sales generated a net profit of Rp1.222 trillion ($125 million) last year, representing 13% profit growth from Rp1.079 trillion ($120 million) in 2004.
The company now claims that several investors are now interested in taking up minority shares in the mines. Most of the output of the two mines is exported under supply contracts with Japan, South Korea, Taiwan and Europe. KPC and Arutmin accounted for 37% of Indonesia's coal exports last year, making Bumi far and away Indonesia's biggest coal exporter.
Moreover, Indonesia has recently replaced China as the world's second-largest coal exporter, and industry experts predict it may soon surpass Australia to become the top global supplier of steam coal. A substantial hike in global coal prices - up from about $36 a tonne at the end of last year to about $52 now - industry analysts contend may have had a bearing on Bumi's willingness to scotch the planned divestment.
Credit Suisse First Boston (CSFB), Renaissance's chief financial adviser, was set to extend Indonesia's largest ever corporate loan to facilitate the deal - which along with other foreign creditors was set to exceed $2.1 billion. The rest would have been financed by equity, including $700 million in an exchangeable bond arranged by United Overseas Bank Ltd, Singapore's second-largest lender.
Foreign lenders have demonstrated a new interest in regional coal industry investments, coincident with surging global prices. But given the unpredictability of Indonesia's judicial system and recent surprise rulings against foreign investors, international banks are more circumspect about whom they lend to in Indonesia nowadays.
Renaissance Capital, established in 2002 by by Suryadinata Sumantri, a former partner at accounting giant Deloitte Touche Tohmatsu (DTT), and later joined by his partner Samin Tan, was seen as a reliable, honest partner for the deal. Both partners have earned a reputation in local business circles as highly skilled consultants with a knack for presaging market trends.
They established Renaissance specifically to facilitate financing for Indonesian-owned businesses operating in major energy sectors. Suryadinata and Tan met when they worked for the consultancy firm Hans Tuanakotta and Mustofa (HTM). At the time the firm was the official auditor for the now-defunct state-run Indonesian Bank Restructuring Agency (IBRA), but the consultancy also had a division that sold IBRA assets.
Tan was HTM's managing partner for tax affairs, having learned the ins and outs of the trade at international accounting giant KPMG. However, DTT, citing a possible conflict of interest, later asked that HTM no longer be involved in selling IBRA assets, according to people familiar with the matter.
Nowadays, Renaissance is arguably Indonesia's best-connected investment house. Renaissance's prowess in lobbying the government's new asset-management company, PT Perusahaan Pengelola Aset (PPA), and its current chairman Mohammad Syahrial has raised eyebrows in Indonesian business circles.
PPA currently holds all the unsold IBRA assets pledged to the government in the tumultuous wake of the 1997-98 Asian financial crisis, and Renaissance has played a pivotal behind-the-scenes role in brokering various debt-restructuring deals between the government and indebted business tycoons.
Those connections and market knowledge may have given Renaissance a jump on the Kaltim Prima Coal and Arutmin mines' future earning power, which has lately become widely apparent. However, those connections, at least for now, still aren't enough to seal the mega-deal with Indonesia's equally savvy Bakrie business family.
Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has worked in Indonesia for 20 years, mostly in journalism and editorial positions. He has been published by the BBC on East Timor and specializes in business/economic and political analysis related to Indonesia. He can be reached at firstname.lastname@example.org.