[nasional_list] [ppiindia] Indonesian coal a family affair

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**http://www.atimes.com/atimes/Southeast_Asia/HC25Ae01.html

Mar 25, 2006 
  

Indonesian coal a family affair 
By Bill Guerin 


JAKARTA - Indonesia's bountiful natural resources are generating massive 
corporate deals, a signal that one of the region's sickest 
post-Asian-financial-crisis economies is finally reviving. In the process, so 
too are some of the business families that ruled the roost under former 
president Suharto's New Order regime. 

In one of Indonesia's largest ever corporate takeovers, Bumi Resources, the 
country's biggest coal exporter, was sold last week for US$3.2 billion to a 
group of investors led by Borneo Lumbung Energi, an affiliate of Jakarta-based 
investment bank Renaissance Capital, and the Marubeni Corp, Japan's 
fifth-largest trading company. The groups bought 95% of Kaltim Prima Coal (KPC) 
and 100% of Arutmin Indonesia and IndoCoal Resources Ltd at a whopping 54% 
premium on the company's current market value. 

Marubeni is expected to cover up to 50% of the purchase and plans later to 
build a coal-fired power plant in Indonesia. The Japanese concern said it needs 
more coal to supplement supplies from its mines in Australia and Canada to meet 
the steep rise in demand for coal used at power plants at home and in China. 

Bumi's decision to sell the lucrative mines comes at a time when surging demand 
in China and India have helped to buoy global commodity prices. Mining 
activities account for roughly 10% of Indonesia's gross domestic product, but 
the industry is still highly underdeveloped. At the same time, multinational 
resource companies are encountering a growing series of protests, attacks and 
nationalistic confrontations from various Indonesian interest groups. 

The sale also represents the second-biggest divestment ever for an Indonesian 
company, topped only by last year's $5.2 billion sale of the country's 
second-largest cigarette producer, HM Sampoerna, to US tobacco giant Philip 
Morris International by the high-rolling Sampoerna family. 

Bumi, affiliated to one of Indonesia's oldest and biggest conglomerates, Bakrie 
& Brothers Tbk, better known as the Bakrie Group, started life as Bumi Modern 
in 1973 and later became a major player in the hotel and tourism sector. The 
family company had close ties to Suharto, and like many Indonesian companies 
fell on hard times in the wake of the Asian financial crisis. In 1998, citing 
adverse economic conditions, the Bakrie family shifted its core business from 
domestic-oriented hotels to export-oriented oil, natural gas and mining. 

The move paid off handsomely. Sources close to the deal said the Bakrie family 
and other members of the consortium put $750 million into the kitty, with the 
remaining $2.5 billion pledged from debt instruments arranged by Credit Suisse 
First Boston (CSFB). Last year Bumi successfully sold $600 million in 
dollar-denominated bonds, which were backed by cash flows generated at Arutmin 
Indonesia and Kaltim Prima Coal. 

The deal has a notable political component, harking to the New Order days. 
Aburazil Bakrie, who until December served as senior economics minister and is 
now the coordinating minister for social welfare, is one of Indonesia's richest 
officials, with a declared personal wealth of $121.9 million. Last year he ran 
for the Golkar party leadership. Though he didn't win, his standing in 
Suharto's old party is strong, and Golkar is still popular in the regions, 
notably where most of the country's energy projects are. 

Bakrie has been rumored to have links to Renaissance and its Recapital Asia 
subsidiary - though the family is on record denying any connection. Recapital 
Asia has been at the center of many recent blockbuster debt-restructuring 
deals. Edwin Soeryadjaya, son of the founder of Indonesia's national car 
company Astra, and Sandiaga S Uno, chairman of the Young Indonesian 
Entrepreneurs Association, jointly own Recapital Asia, which was previously 
known as Rifan Financindo Advisory. 

Before establishing Renaissance, Samin Tan, Surjadinata Sumantri and Dessi 
Natalegawa were all partners at the Jakarta office of accounting firm Delloite 
Tohmatsu. To date the finance company's reputation in capital markets has been 
top-rate, and it has successfully secured international financing for 
restructuring several indebted Indonesian-owned enterprises. Its prowess in 
lobbying with the government's asset-management company, Perusahaan Pengelola 
Aset (PPA), and its current chairman Mohammad Syahrial is the envy of other 
Jakarta finance houses. 

Market watchers say Renaissance can broker funds into deals that many lenders 
would not touch, allowing it to leverage big deals with little capital. With 
Renaissance up front, but not obviously linked, the Bakrie Group would not fear 
any stigma of recently being one of Indonesia's biggest indebted conglomerates 
and today one its most financially active, some insiders suggest. 

Renaissance's Tan and Sumantri also jointly own Borneo Lumbung Energi, 75% and 
25% respectively. Tan recently commented, "We will not sell Bumi again for the 
time being," a seeming admission that Renaissance has not only bought the two 
Bumi mines through Borneo Lumbung Energi, but is also calling managerial shots 
at Bumi. 

Others behind Renaissance, like the founders themselves, had been leading 
executives in Chandra Asri, the first and only olefin (hydrocarbon) complex in 
Indonesia. Controversial from the outset, the $1.5 billion megaproject, awarded 
through the patronage networks of Suharto's New Order era, swallowed up vast 
amounts of money, suffered extraordinarily unfortunate timing, and highlighted 
the financial woes many Japanese trading companies suffered in their dealings 
with the then-ruling family's business associates. 

"If Bakrie really is behind Renaissance, it would be a silent comeback for the 
family after losing control over Bank Nusa Nasional, one of the banks that 
merged [under government supervision] into Bank Danamon," said Yosef Ardi, a 
business editor at Bisnis Indonesia. 

Back from the dead
In 2001, Bumi paid $140 million for its 80% stake in Arutmin from Australia's 
BHP Billiton. At the time, analysts were skeptical about the previously 
indebted company's ability to raise the funds needed to make the purchase. The 
deal was highly controversial given Bakrie's debt-restructuring exercise 
earlier that year, in which the company swapped $1.1 billion in debt for new 
equity, and was legally prohibited from making any new acquisitions. The deal 
went through nonetheless. 

Bakrie's creditors then owned 95% of the diversified conglomerate, including a 
20% stake in Arutmin. Two years later, Bumi bought the entire stake in KPC for 
$500 million, including assumed debt, from Anglo-American energy giant BP Plc 
and Anglo-Australian mining conglomerate Rio Tinto. The government estimated 
KPC's value at $822 million at the time. 

Analysts noted that Bumi's debts at the time of the KPC acquisition were three 
times as high as its capital, with a debt-to-equity ratio of 3.2:1. In such a 
position, any banks following prudential banking principles would have been 
unlikely to offer the company new loans - hence there are many unanswered 
questions about the KPC deal. 

The divestment process had been delayed for years, partly because of a dispute 
with the local administration. The deal was made at a time when the team, set 
up by Laksamana Sukardi, the state minister of state enterprises, was in the 
process of finalizing talks with the East Kalimantan administration. Sukardi 
had warned of "strict measures" against KPC if the company did not comply with 
Article 26 of the contract, which stated that KPC, like Arutmin, should only 
sell its shares to the Indonesian government, other Indonesian-owned 
institutions or Indonesian individuals. 

By then, the two multinational resource giants had grown weary of the 
protracted squabble. Insiders say Bumi approached BP with an offer that 
persuaded the British energy giant to depart the local mining industry 
altogether. Rio Tinto, clearly averse to being left as the underdog in 
Indonesian hands, was quick to follow suit and agreed to the deal. 

There was still unfinished business, however. Under the nationalistic 1982 Coal 
Cooperation Agreement, struck between the central government and individual 
companies, mines had to be 51% locally owned on the 10th anniversary of 
beginning operations. KPC was obligated to divest 51% of its ownership, with 
the first divestment scheduled for October 2003. Based on the purchase 
agreement between Sangata Holding, Kalimantan Coal and the Regency Government 
of East Kutai, 18.6% of KPC's shares were to be given to the regency, through 
Kutai Timur Energi, a district-owned company, leaving the to-be-divested stake 
at 32.4%. 

Bumi offered this to a number of local companies through a tender. Little-known 
mining-service company Sitrade Nusaglobus won through a $399.98 million bid and 
in August established a new subsidiary, Sitrade Coal. The Bakrie Group at the 
time denied rumors that Sitrade was part of its holdings, but Bumi later 
purchased 99% of Sitrade Coal from Sitrade Nusa Globus for Rp7 billion 
($700,000). 

Revisiting the costs and the receipts from asset sales, Bumi's total outlay for 
the two mines was just short of $251 million, earning it an apparent net profit 
of just under $3 billion from the recent sale. 

The company is expected this month to post 2005 earnings of about $237 million, 
and its shares rose 5.4% to a record Rp980 per share on news of the sale. 
Trading was later suspended by the Jakarta Stock Exchange pending further 
details of the transaction. (Trading resumed on Wednesday.) The current share 
price gives Bumi a market capitalization of Rp19 trillion ($2.08 billion), 
meaning that the sale price was an eye-popping 54% over the company's market 
value. 

Why sell?
Last year Indonesia produced 155 million tons of coal, making it the world's 
second-biggest coal exporter after Australia. KPC and Arutmin are Indonesia's 
second- and fourth-largest coal producers respectively, and account for some 
29% of national coal production. Combined, they generated $1.1 billion in net 
sales in 2005, with an operating income of $2.93 million. The mines have 
combined proven and probable marketable reserves of 959 million tons, according 
to energy analysts. 

The Bumi mines hold contracts with several major Asian utility companies, but 
demand for coal will increase in Indonesia because of the planned construction 
of coal-fired power plants to meet spiking domestic electricity demand, which 
is growing by some 7% a year. The government has said it wants to speed up the 
construction of power plants fired by fuels other than oil amid high crude 
prices and fears of power shortages in Java, home to about 60% of Indonesia's 
238 million people. 

Bumi said in a statement that the sale, subject to approval from Bumi's 
shareholders, would allow the company "to realign its focus into the energy and 
natural resources sectors which management believes have greater long-term 
potential for Bumi". 

Some of the money will be used to build plants that produce diesel from coal 
and crops such as oil palm. Another Bakrie family business, publicly listed 
Bakrie Sumatera Plantation, is planning to expand its oil-palm and rubber 
plantations in Sumatra and Kalimantan over the next three years to tap the 
growing demand for the commodities worldwide. 

Nationally, Indonesia is also seeking to increase the use of other sources of 
energy such as natural gas and coal in the face of rising crude prices and 
declining domestic production. Within five days of the statement announcing the 
mines' sale, Bumi had publicly indicated its plans to build an 
80,000-barrel-a-day coal-liquefaction factory in South Sumatra to help reduce 
petroleum use. 

The company is also in discussions with South Africa's Sasol, the world's top 
producer of synthetic fuel, which converts coal or natural gas to liquid fuel 
without the generation of crude oil as an intermediary product. Eddie Soebari, 
Bumi's finance director, estimates that 48,000 tons of coal can be converted 
into 80,000 barrels of synthetic oil a day. To secure coal for the new project, 
Bumi plans to pay as much as $3 million for Sumatran company Pendopo Energi 
Batubara, which has estimated resources of more than 1.5 billion tons of 
low-energy coal. 

Jeffrey Mulyono, head of Berau Coal, Indonesia's fifth-largest coal producer, 
and chairman of the Indonesian Mining Association, notes that if crude is above 
$26 a barrel, it makes economic sense to convert coal. 

Shortly after the news about Sasol surfaced, Bumi officially confirmed its 
planned July merger with Energi Mega Persada (EMP), Indonesia's second-largest 
privately owned domestic oil-and-gas company with interests in eight 
exploration blocks and proven reserves of 319 million barrels. This will create 
Indonesia's biggest private energy company, with combined assets worth more 
than Rp21.1 trillion ($2.3 billion). 

"We have opted for a share-swap deal ... to keep costs down," Bumi president 
Ari Saptari Hudaya said, adding that the company planned to use its capital to 
expand into new businesses. 

Eye to eye visions
Bumi's plans are strikingly in line with the government's designs for the 
sector. Vice President Yusuf Kalla this week gave an upbeat assessment to 
potential international investors about future energy-oriented investment 
projects: "Please keep in mind that our country is so rich in resources. This 
will be an advantage for any industry in developing its business here. China 
and India have less resources compared to us." 

Kalla also claimed that the government would make Indonesia's energy prices the 
lowest in the world by 2008 through the conversion of some 1,000 megawatts of 
oil-fueled power plants into gas, coal and geothermal plants. The combined 
capacity of state electricity utility power plants is currently 25,000MW, of 
which oil-based fuels generate 10,000MW. 

The government projects are estimated to cost as much as $6 billion and the 
government has encouraged foreign investors to participate - though that 
invitation has not yet been put to the nationalistic test. 

Foreign direct investment grew by 14% in 2005 to $12.1 billion, and the 
government hopes for another 15.2% increase this year. A draft investment bill 
is being debated in the House of Representatives, which, if passed, would turn 
the common 150-day or more process for finalizing investment permits into a 
one-stop, 30-day registration process. 

Foreign investors would also have guarantees against any future nationalization 
- no small point given the recent concerted attempts by local protesters and 
opportunistic politicians to paint US mining giants Freeport McMoRan and 
Newmont as bogeymen in Indonesia. Kalla recently said the government should 
revise the profit-sharing contract with Freeport to give Indonesia a bigger 
slice of the revenues. 

There have also been nationalistic rallies staged against the recent deal 
between state-owned oil company Pertamina and ExxonMobil Corp to jointly 
operate the country's largest untapped oilfield, known as Cepu. 

But there could be bigger systemic troubles in the pipeline for foreign 
investors. Yogo Pratomo, director general for electricity and energy, revealed 
this week that the government is now reviewing existing regulations that would 
enable the government to scrap tender offers and directly appoint contractors. 
"It would take at least a year for the projects to get off the ground if we did 
it by tender." 

Should this measure, which smacks of a return to Suharto's tendency to award 
contracts strictly to favored local businessmen, actually be implemented, 
Indonesian nationals would likely trump foreign suitors based on the quality of 
their connections rather than their business models or technical expertise. 
And, if that's the case, expect Bumi and the Bakrie family to get their fair 
share of the action. 

Bill Guerin, a Jakarta correspondent for Asia Times Online since 2000, has been 
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 
softsell@xxxxxxxxxxxxx 

(Copyright 2006 Asia Times Online Ltd. All rights reserved. Please contact us 
about sales, syndication and republishin

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