[nasional_list] [ppiindia] Indonesian coal a family affair
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- Date: Sat, 25 Mar 2006 01:06:19 +0100
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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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