Wed, 24 Nov 2010

To the ancient Romans, vallar was the laudatory adjective applied to the legionary who first surmounted the enemy’s ramparts and broke into his camp.

At first sight, that is what Nathaniel Rothschild has done with a $3bn deal that will turn his Vallar cash shell into a London-listed Indonesian coal group. But what if it is actually Vallar’s ramparts that are being scaled?

Under the complex deal, Vallar will pay $739m in cash and $833m in new shares for 75 per cent of Berau Coal and Energy, controlled by Indonesia’s powerful Roeslani family, and $1.43bn for 25 per cent of Bumi Resources, controlled by the even more powerful Bakrie family.

The attraction for Vallar is simple: Bumi Resources is Indonesia’s biggest thermal coal producer; Berau its fifth-biggest. Together, they control 12bn tonnes of coal resources. Future demand looks assured: China, India and Indonesia are all industrialising, with power generation plans requiring vast amounts of coal.

Mr Rothschild, a scion of the international banking family, has spoken of returns of up to 300 per cent for Vallar shareholders. For such a prize, the price looks cheap: the deal values Berau at six times trailing earnings before interest, tax, depreciation and amortisation, and Bumi at four times. Yet it is the Indonesian companies – and their family shareholders – who will reap the real benefits.

For a start, Vallar shareholders will retain only a minority stake in their company, which will change its name to Bumi Plc and issue fresh shares to the vendors. Bakrie Group will own 43 per cent of the enlarged share capital, Recapital Advisors (a Roeslani family vehicle) 24.9 per cent, and existing Vallar shareholders 32.1 per cent. The chief executive and finance director of Bumi Resources will double up in the same jobs at Bumi Plc, and the chairman will be Indra Bakrie, brother of Aburizal Bakrie, the billionaire head of the family. Mr Rothschild will be co-chairman, with Rosan Roeslani, head of Recapital and a director of several Bakrie Group companies, as deputy chairman.

Together, the Bakrie and Roeslani families will speak for four of the six senior directors, and 67.9 per cent of the shares. In line with UK corporate governance rules, the board will have a majority of non-executive directors. In effect, though, the families have secured the respectability conferred by a London listing while retaining control of the assets they are injecting. In case anyone should be in any doubt, the offer documents spell out that Bakrie Group “will continue to control the management, operations and policy” of Bumi Resources.

The offer document also notes that the London listing will give the two coal companies “increased liquidity and visibility for any future equity raising, debt refinancing or other capital markets transaction”. In other words they will be able to use Bumi Plc as a vehicle for raising cash to reduce their combined net debt burden, which stands at $4.4bn.

Paying for a share in Indonesia’s coal prospects might make sense for Vallar even without control of the assets if it could be sure of the outcome. There is a lot of money to be made in Indonesia – just ask the planeload of private equity bankers who land in Jakarta every Monday.

But there are also enormous risks. The country ranks 110th in Transparency International’s index of corruption perceptions, just above Ethiopia. The Asian Corporate Governance Association’s latest report says its securities laws fail to prevent either insider trading or market manipulation, while prosecutions usually fail. It adds, witheringly: “The attorney general’s office is considered to be one of the most corrupt institutions in Indonesia, while judges can almost always be had for a price.”

Mr Rothschild seems to have done this deal in a few weeks, which does not allow much time for due diligence. But he must surely be aware that three Bakrie group companies were recently fined Rp500m ($55,000) by the Indonesia Stock Exchange for filing financial statements that mis-stated their cash reserves. And that, in a separate case, a tax official is on trial for allegedly accepting $3m in bribes from subsidiaries of Bumi Resources – a claim the company denies. More prosaically, the Bakrie empire has nearly collapsed twice in the past 12 years, after the 1997/98 Asian financial crisis and again in 2008.

Mr Rothschild has arranged some protection: the offer documents impose a $150m penalty on Bakrie Group if it fails to complete. But as he told the Financial Times last week: “As we’ve seen recently, things can go terribly wrong, terribly quickly. So you have to make hay while the sun shines.” He might have added that if you’re doing business in Indonesia, it makes sense to carry an umbrella, too.

Kevin Brown is the FT’s Asia regional correspondent