Nat Rothschild Rues ‘Terrible Mistake’ in Deal Gone Sour
Nat Rothschild, dressed in a hooded sweater, jeans and hiking boots, perches on a cowhide sofa in his relatively modest chalet-style apartment in the Swiss ski resort of Klosters.
He recalls the fateful day in October 2010 when, as he scanned the globe for business opportunities, he first heard the word Bumi, Bloomberg Markets will report in its June issue.
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Ian Hannam, a well-known JPMorgan Chase & Co. (JPM) investment banker, had e-mailed Rothschild suggesting he look at two coal companies, including PT Bumi Resources, linked to the Bakrie family, a powerful Indonesian business dynasty.
“He said it was the best deal he had ever seen in his life,” Rothschild says.
Hannam’s approach was the first step down a path that would lead to an ugly boardroom brawl pitting Rothschild against the Bakries. As it unfolded, the clash would see the two sides trading claims of e-mail hacking, bad faith and fraud. It would leave few reputations, including Rothschild’s, unscathed.
“I am the first to admit we made a terrible mistake,” Rothschild, 41, says of his decision to partner with the Bakries.
It’s early March as he speaks. Two weeks earlier, Rothschild had lost a critical shareholder vote he had hoped would put him back in control of the company he and the Bakries had created, Bumi Plc. Although defeated, he still holds 18 percent of Bumi’s shares and says he’s not giving up the fight.
“The board needs to have their feet held to a fire,” he says.
The wild ride for investors -- many hit by losses of 75 percent -- may have yet more stomach-churning twists, with Bumi under the effective control of an Indonesian tycoon who rode to the Bakries’ rescue.
Samin Tan, 49, is the polar opposite of the aristocratic Rothschild: a village boy-turned-billionaire who didn’t see a car until he was 15 and says self-deprecatingly that he neither fully understands U.K.-style corporate governance nor enjoys visiting London because each trip means enduring 13 hours inside a plane without a cigarette.
Nathaniel Rothschild, scion of a family synonymous with financial success, is the youngest of four children of Jacob, the 4th Baron Rothschild, 77, who heads RIT Capital Partners Plc (RCP), which managed 2 billion pounds ($3.1 billion) as of March 31.
At the University of Oxford, Nat acquired a party-boy image that would haunt him throughout his 20s. Rothschild, who’s dating a 22-year-old model, Daisy Cummings, doesn’t drink or smoke these days and generally is in bed by 9:30 p.m.
“I lead a very boring life,” he says.
Rothschild’s professional life has been anything but boring.
He joined Atticus Capital LLC, a New York-based hedge-fund firm, in 1996 as an equity partner and became co-chairman in 2005. At its 2007 peak, Atticus managed more than $20 billion. The firm disbanded in 2009 following the global financial crisis.
From 2005 to 2011, Rothschild also served as chairman of Russian billionaire Oleg Deripaska’s En+ Group, the holding company for the oligarch’s controlling stake in United Co. Rusal, the world’s biggest aluminum producer.
His most daring financial play -- the one that would come back to haunt him -- came in July 2010, when he raised 707 million pounds on the London Stock Exchange for a company with no operating assets.
Vallar Plc was a blank-check company, so-called because that’s what investors give the founders: In Rothschild’s case, he merely promised to use the proceeds from Vallar’s initial public offering to buy mining assets within two years subject to the approval of the independent board of directors.
Putting his reputation and 92 million pounds of his own money on the line, Rothschild jetted around the globe in his Gulfstream G550 soliciting investors for the IPO. Many big institutions signed on, including Abu Dhabi Investment Council and Schroders Plc. (SDR)
Achmad Bakrie, who died in 1988, and later his eldest son, Aburizal, now 66, built a politically connected empire spanning steel, plantations, real estate and telecommunications. They were among the few ethnic Indonesian tycoons in a crony economy dominated by businessmen of Chinese descent.
The 1997 Asian financial crisis rocked the Bakries. Laden with $1.3 billion in debt, Aburizal gave away 97.5 percent of his empire to creditors, his son, Anindya, 39, says. Then, as the Indonesian economy rebounded, so did the Bakrie companies.
By June 12, 2008, they accounted for 15 percent of the market value of the Jakarta exchange, according to data compiled by Bloomberg. Aburizal also solidified his political power, holding cabinet posts from 2004 to 2009.
What hadn’t changed was the Bakries’ dependence on debt or their predilection for cross-holdings and other opaque transactions that turned off many foreign investors, says Mirza Baig, founder of Hyderabad, India-based Hikma Governance Consulting, which advises institutions on investments throughout Asia.
In October 2008, during the height of the global banking crisis, shares in PT Bumi Resources (BUMI) were suspended by the Jakarta stock exchange for a month after they plunged 32 percent in one day. Bumi Resources secured a $1.9 billion loan from China Investment Corp., the Chinese sovereign wealth fund, on which it paid annual interest of 19 percent in 2009.
For the Bakries, what made the Rothschild deal so attractive was access to London’s established capital markets, says Bakrie Group spokesman Chris Fong.
For Rothschild, the Bakries’ woes were part of the deal’s appeal.
He could acquire stakes in Bumi Resources and a second Bakrie-linked company, PT Berau Coal Energy, through Vallar’s London-listed holding structure. Given the U.K.’s reputedly superior corporate governance rules, Rothschild says, he reckoned investors would be willing to pay higher multiples for the London-listed company than for the underlying Indonesian assets.
Rothschild says he was also convinced by Hannam that the Bakries wanted to improve their image ahead of the 2014 Indonesian presidential election, in which Aburizal is a candidate. Combining the Bumi Resources and Berau stakes under the Bumi Plc umbrella would create a mining giant just as China’s demand for coal-generated power seemed insatiable.
The deal came together fast -- perhaps too fast. Less than three weeks after Hannam’s e-mail, Rothschild met Nirwan Bakrie, one of Aburizal’s younger brothers, in Los Angeles and shook hands on the transaction.
Three weeks later, he flew to Singapore to formalize the $3 billion deal. Only then did Rothschild personally visit the island of Borneo to inspect his new company’s star asset, Bumi Resources-owned PT Kaltim Prima Coal, one of the world’s largest sources of coal for power generation.
The deal eventually gave Rothschild’s Vallar 29 percent of Bumi Resources and 85 percent of Berau. The Bakries got 55 percent of Vallar.
An Indonesian with ties to the Bakries, Rosan Roeslani, who had been the majority shareholder in Berau, got 13 percent of Vallar. Rothschild was left holding 3.6 percent of Vallar, although he remained co-chairman alongside Indra Bakrie, another younger brother of Aburizal. Vallar was then renamed Bumi Plc.
How much due diligence was done -- and by whom -- is the subject of heated debate. In a January statement, Bumi said Vallar Advisers LP, Rothschild’s management company, was responsible for vetting the two Indonesian companies.
Rothschild says Vallar Advisers relied on 50 different experts and consultants who pored over thousands of documents, including prospectuses from Berau’s August 2010 Indonesian IPO and a September 2010 U.S. bond issue for Bumi Resources, both of which were marketed by Credit Suisse Group AG (CSGN) and JPMorgan.
“The mistake we made was relying far too much on the supposed relationship that Hannam and JPMorgan had with the Bakries,” says Rothschild, who had boasted that Bumi investors would double their money.
In response to e-mailed questions, a spokesman for Hannam, who no longer works at JPMorgan, says that by early 2011, Hannam was under investigation by the U.K. Financial Services Authority over an unrelated deal. Because of this, his work on the Vallar-Bumi merger was overseen by others. Hannam, who was fined by the FSA, has appealed the case. Credit Suisse and JPMorgan declined to comment.
Investor Mark Mobius says Rothschild should have known better.
“I was shocked that Rothschild would get into such a venture,” says Mobius, who oversees $50 billion at Templeton Emerging Markets Group. “I am not saying the Bakries have done anything wrong, but given their history of corporate governance, I was surprised.”
At first, Bumi Plc seemed to be a success. Having debuted at 10 pounds the previous July, the shares hit 14 pounds in April 2011. That spring, the Bakries pledged their Bumi shares as collateral for a $1.35 billion loan from Credit Suisse and other lenders.
A coal company’s fate, however, is forever linked to the price of coal. After peaking at $138.50 a ton in January 2011, the price of thermal coal at Australia’s Newcastle port, a benchmark for Asia, slid to $122 by September that year as growth in China, the biggest consumer, slowed.
Bumi’s shares, meanwhile, fell almost 30 percent from their April peak. When they crossed 8.50 pounds in early October 2011, the Bakries faced a margin call on the $1.35 billion loan, according to a Bumi statement. Bumi Resources also faced pressure to reduce interest payments on its $1.9 billion loan from CIC.
As Bumi shareholder concern increased that the Bakries might sell their shares, Ari Hudaya, a Bakrie lieutenant who was Bumi’s CEO, stopped attending board meetings.
“We were told he was too ill to travel,” says Julian Horn-Smith, Bumi’s senior independent director.
Rothschild says he became convinced Hudaya was ducking the board. Bakrie spokesman Fong says Hudaya was indeed sick. In early April, Hudaya was outside Indonesia seeking medical treatment and unavailable to comment for this story, Fong says.
Rothschild says he became alarmed about $1 billion worth of suspicious transactions at Bumi Resources and Berau.
These included spending on an iron ore mine in Mauritania and an oil field in Yemen, neither of which was producing. In December 2011, Bumi would write these assets off completely after auditor PricewaterhouseCoopers LLP said it couldn’t confirm their valuation.
Bumi Resources had also given Roeslani’s company, PT Recapital Advisors, $500 million in investments and loans, and then allowed Recapital to delay repayment, according to Bumi Resources financial filings in Indonesia.
Rothschild says that when he brought his concerns to Bumi’s board, the independent directors -- all of whom he had appointed -- refused to act.
“They were like deer in the headlights,” he says.
Horn-Smith, one of those appointees, says the board shared Rothschild’s concerns and immediately consulted lawyers and accountants. As of April 8, Roeslani’s companies hadn’t returned the money.
After initially agreeing to be interviewed, Roeslani didn’t return follow-up calls. (Roeslani is an investor in PT Idea Karya Indonesia. PT Idea and Bloomberg LP are partners in Bloomberg Television’s Indonesian-language service.)
Enter Tan, a former tax accountant who made a fortune when a coal mining company he controlled, PT Borneo Lumbung Energi & Metal (BORN), went public in Jakarta in 2010.
Tan says he has known the Bakries since his days as a tax consultant. In November 2011, when Credit Suisse called the Bakries’ loan, Tan borrowed $1 billion from Standard Chartered Plc and bought half of the family’s Bumi stake. Tan says it was a business decision, not a friendly helping hand.
“We earn our own money; we make our own decisions,” he says over lunch in his headquarters overlooking Jakarta’s National Monument.
In retrospect, Tan acknowledges two mistakes.
“We did not expect the coal price would collapse,” he says. “Secondly, we have underestimated the level of the relationship breakdown between the Bakries and Nat.”
On Nov. 8, 2011, the same day Bumi Resources announced that, thanks to Tan’s intervention, it had repaid $600 million of its CIC loan, Rothschild wrote to Bumi CEO Hudaya. The letter cited alleged accounting irregularities at Bumi Resources and Berau and called on Hudaya to clean up the balance sheets and corporate cultures at both companies.
Then, Rothschild says, he leaked his own letter to the Financial Times. Fong says Rothschild was trying to drive down Bumi’s share price so he could buy the Bakries out. Rothschild denies this.
Either way, the letter amounted to a declaration of war. Tan says he warned Rothschild about his confrontational approach.
“I told him his style doesn’t work in Indonesia,” Tan says.
“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,” says Simon Murray, chairman of commodities giant Glencore International Plc and an old Asia hand. “You particularly don’t do what he did to a bunch of Asian toughies.”
Meanwhile, the price of coal kept falling, dropping below $90 a ton in June 2012. By then, Bumi’s stock had slid 64 percent since the start of the year.
In September, Rothschild presented the board with hundreds of documents alleging accounting irregularities at Bumi Resources, its PT Bumi Resources Minerals subsidiary and Berau.
Rothschild says the documents also show Tan was aware of the irregularities and had sought a side deal with the Bakries to protect Borneo Lumbung. Tan says there was no such deal and denies hiding anything from the board.
Rothschild says the documents came unsolicited from a whistle-blower, whose identity he won’t reveal. The Bumi board handed them to regulators and police in London and Jakarta and appointed London law firm Macfarlanes LLP to investigate. The day the board announced those moves, Bumi’s stock fell 25 percent and Hudaya resigned.
All the while, Rothschild was losing board support. During a fiery October board meeting at the Mandarin Oriental hotel in Singapore, the Bakries proposed buying back all of Bumi’s mining assets, according to four people who were there. Rothschild, surprised by the proposal, hurled invective at both Tan and Robin Renwick, head of Bumi’s audit committee.
Afterward, Tan and Renwick wrote to Horn-Smith, threatening to resign unless Rothschild, who had already relinquished the co-chairmanship, left the board entirely.
On Oct. 15, Rothschild obliged. He then began assembling a 270 pounds million bid to regain control of Bumi and proposed that a slate of his own candidates, including himself, replace Tan, who had become Bumi’s chairman, and almost all of the directors.
The existing board had a different plan: to divorce Bumi Plc from the Bakries, who would pay $278 million in cash and surrender their Bumi shares to buy back Bumi Plc’s stake in Bumi Resources, leaving Bumi with the smaller Berau.
Bumi Plc set a shareholder meeting for late February to vote on Rothschild’s proposal. The Bakries said that they would not agree to any separation if Rothschild won the vote.
In January, Bumi announced that Macfarlanes found circumstantial evidence to support some of the claims in the alleged whistle-blower documents. Bumi also said that technical analysis by an undisclosed firm determined that many documents had been obtained through e-mail hacking. (“I’ve done nothing wrong,” Rothschild says. Of the whistle-blower, he says, “The question of the provenance of the documents was for the whistle-blower, not for me.” He says he put Macfarlanes in touch with the whistle-blower’s lawyers.)
The board declined to release the full report, saying Indonesian law forbids publication of information obtained by hacking. Rothschild says that the shareholders’ interest in the report’s contents should be paramount.
On Feb. 21, Bumi Plc shareholders gathered to vote on Rothschild’s package of proposals at the headquarters of the Honourable Artillery Company, a British army reserve regiment.
The armor and muskets on the walls created an appropriately martial atmosphere. Rothschild strode briskly into the room accompanied by his mother, Serena Rothschild, also a shareholder.
“She adores me, and she wanted to come,” Rothschild says.
In the end, 19 of Rothschild’s 22 proposals were voted down. He did succeed in kicking off two Bakrie-affiliated directors and installing one from his slate.
Bumi’s ultimate fate remains unclear. On April 12, Bumi announced that after investigating Berau’s financial statements, it found $94 million in questionable expenditures. A week later, trading in Bumi’s shares was suspended after the company said it could not meet an April 30 deadline for publishing 2012 annual results.
Rothschild claims the Bakries, who paid a $50 million deposit, don’t have the remaining $228 million to complete the separation deal. Anindya Bakrie says the family does have sufficient funds.
Whatever the case, gone for now is the dream of Bumi becoming a global coal colossus.
Meanwhile, the Bumi saga haunts the City of London at a time when companies from emerging markets are seeking respectable footholds.
“Bumi shows that good governance is not about form; it is about culture,” says Hikma’s Baig. “Bumi Plc’s policies and controls were pasted on top, but they had no real impact -- or even insight -- into what was happening at the operational level.”
After his defeat at the Honourable Artillery Company, Rothschild retreated to Klosters. With morning sunlight glinting off Alpine summits and streaming into his living room, he isn’t in a self-flagellating mood.
“I’ve had a lot of luck in my life,” he says. “This time, I got unlucky.”
While he disputes the notion that Bumi has ruined his ability to raise money in London, he says he’s not rushing into another deal. Pocketing his BlackBerry, he heads out to hit the ski slopes.
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