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February 24, 2013 7:03 pm
Last week’s shareholder showdown at Bumi may have been entertaining but it has left many questions unanswered about the Indonesian mining company’s future.
One can understand why shareholders declined to back the candidates put up by the group’s dissident founder, Nathaniel Rothschild. While the financier has proved an energetic corporate wrecking ball since leaving Bumi last year, he conspicuously failed to convince when he had a more constructive role to play.
But the result has left in place most of the existing board which, together with the Bakrie family and their allies, must take much of the blame for the stock’s calamitous underperformance.
Their survival is not simply due to the predictable support of a sizeable claque of Asia-based allies. They were backed also by UK investors.
This reflects not affection but a cold-eyed calculation that the status quo offers the best hope for extracting some short-term value from Bumi, and recouping at least part of the near two-thirds decline the shares have suffered since their flotation in 2010.
The Bakries have promised to buy back Bumi’s 25 per cent stake in PT Bumi – a company that controls many of the group’s coalmines – in return for cash and a cancellation of their stake in Bumi. The idea is that this “amicable divorce” would lift the cloud over Bumi, freeing it to focus on raising production at Berau, its other coal subsidiary.
But the vote does little to sort out Bumi’s dysfunctional governance, arguably the biggest cause of its underperformance.
Bumi remains tied to the Bakries when it is seeking to sell them the stake in PT Bumi without any apparent intention to solicit bids from third parties. This is hardly best practice when it comes to extracting value for such an asset and the expected price is well below what Bumi paid two years ago.
Crucially, the independent directors are also looking into allegations about financial irregularities – amounting to some $1bn, according to Mr Rothschild – most of them involving PT Bumi.
It is impossible to imagine that a real investigation could avoid mentioning the Bakries. After all, the original deal Mr Rothschild struck gave them the right to nominate the executive management of PT Bumi, and hence control it. An inquiry commissioned by Bumi from Macfarlanes, a London law firm, to look into the claims reported recently that it was unable to substantiate them because of the unwillingness of unnamed “key individuals” to provide information.
When Bumi was created in 2011, through the reversal of two mining groups into Vallar, Mr Rothschild’s London-listed cash shell, the idea was that by grafting UK governance standards on to these businesses, the value “trapped” within could be “unlocked”. It is a waste of ink to list the ways in which Bumi fell short of this goal. Even the cardinal principle the Bakries’ voting control should be limited has been flouted, with the family recently revealed to have a shareholder pact it kept secret from the UK authorities.
While the minority shareholders are entitled to protect their position by extracting themselves from the Bakries’ clutches, there are wider issues at stake. In recent years, foreign mining companies have listed in London, many of them relying on just the sort of “relationship agreement” between dominant shareholders and minorities that was supposed to govern affairs at Bumi.
The credibility of the authorities in enforcing these agreements, not to mention UK market rules, is now at stake. To allow the board and the Bakries to cook up some discreet divorce would simply advertise the spinelessness of officialdom. Such an attitude might in turn encourage others who wanted to put the screws on minority shareholders. Ultimately, valuations could be tainted by a governance discount, pushing up the cost of capital for all UK companies.
Surely no British company facing allegations of similar seriousness would escape a public investigation into whether it had breached the Companies Act.
There is a public interest in revealing what went on at Bumi and, if necessary, apportioning the culpability for it between the company’s officers, major investors, executives and highly paid advisers. The moment to launch such an inquiry is now. It should be taken.
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