Article Vallar: raising the stakes (update 2)

GOOD governance is not synonymous with traditional Bakrie Group methods, but Nirwan Bakrie seems as proud of the reputational value of his deal with British investment firm Vallar as he is with the fact that it puts his family in charge of the world's biggest thermal coal business.

The deal pulling together the group's Bumi Resources interests with those of another big Indonesian operation, Berau Coal Energy, under a London listing and a place in the FTSE 100 is potentially transformational for Bakrie.

But the affable, raspy-voiced, chain-smoking co-head of the Bakrie clan -- his older brother Aburizal has stepped back from the business to pursue presidential ambitions -- has other schemes brewing.

The next priority for its group-altering potential is the massive Masela Block gas property in the Arafura Sea, where Bakrie's petroleum arm, Energi Mega Persada, has bought 10 per cent and wants more. Nirwan's managers are scouting Australian resource acquisitions.

Nirwan says nothing has yet been specifically targeted, but "that's a place we have to be very close with".

Oh, and if he can come to terms with Football Federation Australia, the Bakries would also like an A-League club. Football and Indonesia's colourful soccer politics are Bakrie passions.

Finalising the deal with Vallar, though, is 59-year-old Nirwan's current preoccupation.

Bakrie is a sprawling, acquisitive conglomerate, its assets heavily weighted to resources, with a reputation for questionable dealings with governments, public officials and minority interests.

Add to that a history of debt crunches, the most recent being in 2008, although the Bakries weren't alone in that condition during the global financial crisis shock to resources prices.

"I think you understand, people understand, when they talk about Bakrie, they talk about governance," says Nirwan, who is chief executive of Bakrie and Brothers, the listed holding company.

"No 2 is Bakrie's lack of capital, but now we have Nat Rothschild and Vallar, which is very good in the equity markets, and very good networks in the financial society.

"So this is a very important deal for us. I'm very glad and very proud of this deal."

So he should be. For all the publicity glow around the 39-year-old finance aristocrat Nathaniel Rothschild as the deal's engineer, the people who appear to have done best out of Vallar -- and probably played a larger part in its genesis than is widely acknowledged -- are the Bakries.

As is now legendary, Rothschild floated Vallar as a pound stg. 707 million ($1.1 billion) investment cash box in the middle of last year.

He was introduced to Nirwan in October and they announced the startling Indonesian deal out of the blue on November 16.

According to Rothschild, "the process was slightly over a month, and that's not unusual".

In his world, perhaps. In Indonesia such matters usually take longer and require more spadework. In 2009, for instance, it took six months for Recapital Advisory, headed by emerging entrepreneur Rosan Roeslani, to clinch the purchase and financing for 90 per cent of Berau, Indonesia's fifth-largest coal producer.

It was persistently speculated that Recapital's purchase was substantially funded by Bakrie interests.

Following completion of the initial November 16 deal with Vallar's payment of $US3bn ($2.8bn) and share swaps, Vallar owns 75 per cent of Berau and 25 per cent of Bumi Resources.

Their combined steaming coal production this year is estimated at 78 million tonnes, rising to 140 million tonnes in 2013.

Bakrie and Brothers owns 43 per cent of the transformed Vallar, to be renamed Bumi Plc.

Recapital has 25 per cent, the investors who bought into the Vallar float are diluted to 28 per cent and Rothschild and his associate James Campbell have 4 per cent.

The third Bakrie brother, Indra, 57, was appointed co-chairman with Rothschild, Bumi Resources president director Ari Hudaya becomes chief executive and Bumi Resources finance director Andrew Beckham will be chief financial officer.

The next stage should further strengthen the Jakarta camp's hand when the non-Indonesian owners of 15 per cent of Bumi Resources are offered a swap into Bumi Plc stock.

The offer is expected to accompany a June 17 prospectus for Bumi Plc's "prime listing" on the London exchange. The London company wants to hold 50 per cent of Bumi Resources by the end of the year.

Nirwan acknowledges the London listing requires far higher levels of disclosure and standards of governance than Indonesian investors are able to demand. Even so, Bakrie companies have had numerous scrapes with tolerant local regulators.

But Vallar also offers the prospect of respectability that opens doors in international finance.

"Yes, (already) there's more people coming to see us from the equity side," Nirwan says. "But from the debt side . . . more banks want to talk of course, but we're not having any problems now."

What opens bankers' doors best is a sharp reduction in the group's towering debt load. Nirwan is intent on slicing both borrowings and debt structure.

Bumi Resources management has targeted $US500m to $US600m of asset divestments this year and are back in talks with China Investment Corporation about restructuring its $US1.9bn debt holding.

Until now, the Chinese fund has been too satisfied with its 12 per cent coupon to consider offers of a part-swap into Bumi Resources stock.

Bakrie has given notice it will repay $US600m in October, a year early, and Nirwan says the issue of swapping more debt into Vallar stock hasn't arisen. . . yet.

As to Australian objects of interest, besides the A-League Nirwan is keeping his own counsel for now.

He points out, though, that his family has a history of working with Australian companies, going back to the days of his father, Ahmad Bakrie, founder of the business dynasty.

"We know for sure that we've been able to work with Australian parties for years," he says.

Bakrie Tubemakers began life almost 40 years ago as a pipe-making joint venture between Bakrie and Brothers and Tubemakers of Australia, while Bakrie Construction was a collaboration with Transfield.

Both are now wholly owned by the group, which recently brought Brisbane company Panax Geothermal into Bakrie Power's first Java geothermal development.

But there are plenty of Australian coal people, too, who are already familiar with the East Kalimantan mines now forming the spine of the new Bumi giant.

Kaltim Prima Coal was once a subsidiary of the former CRA, now Rio Tinto, which developed the biggest East Kalimantan mine and port operation with BP in the late 1980s. BHP, before it had Billiton appended, built the PT Arutmin operations.

Bakrie and Brothers joined both projects as minority partners.

It was explicit in their contracts of work with the Indonesian government that the foreign partners would have to sell down in stages to local firms.

But at one point, in 1997, Bakrie appeared keener to sell, at least from Arutmin.

However, faced with a requirement to sell 51 per cent to a local enterprise, BHP Billiton sold out wholly from Arutmin in 2001.

Rio-BP left Kaltin Prima in 2003, ending a spectacular two-year struggle between some of the nation's most powerful business families, officials and provincial and district governments.

Bumi Resources, until then a little-noticed entity, emerged with both projects, for a total of $648m plus assumed debt, subsequently bringing in Tata Power of India as 30 per cent partner.