When you love a girl, get married; but when you really want to know her, get divorced. – Anon

A few weeks ago, I wrote about the events leading up to the sharp fall in the price of shares of Bumi PLC, the London-listed company that was founded by Nat Rothschild as a cash shell which then acquired the shares of the Indonesian Bakrie group’s coal business (see A Tale of Two Princes, Asia Times Online, September 29, 2012).

Much water has flown under the bridges since then, and more to the point for the two families, many bridges have flown under the water too.

In response to what the Bakrie group saw as scurrilous allegations, the group decided to effect a reversal of all the transactions that had been done together:
a. Firstly a share swap that would remove the Bakrie family holdings in the London listed entity (Bumi PLC) in return for the entity’s holdings of the Bakrie family controlled vehicle in Indonesia (Bumi Resources);
b. Secondly a cash purchase of the London listed company’s remaining shareholding in the Indonesian entity (Bumi Resources) to be completed by year-end 2012;
c. Lastly a purchase of the remaining Indonesian coal asset (Berau Coal) from Bumi PLC by the Bakrie family;
d. Due to the reversals of the transactions, the group also formally requested Nat Rothschild to relinquish his “bonus” shares that had been granted in Bumi PLC due to the above successful transactions in the first place

The last bit was a corporate governance zinger that appears to have been meant to disallow any voting by Nat Rothschild on the proposal on the grounds of it being a matter of self-interest and hence requiring directors to recuse themselves.

In any event, the first three points left a lot of unanswered questions not the least of which was the source of funds for the massively leveraged Bakrie family to fund the purchases of their previous stakes in Bumi Resources and Berau Coal from Bumi PLC. A simple back of the envelope calculation shows that the two deals would have cost the group over US$1 billion; on top of a mountain of maturing debt of over $1 billion across the Bakrie group already.

Then came the questions about valuations – obviously the group had mooted the purchases of these assets back from Bumi PLC well after prices had declined by over 50%. In effect, this meant that the cash shell in London would end back with cash, but a lot lower than what had been raised and paid to the Bakrie family in the first place.

Delving a little closer into the details, it also became quite clear that the biggest monetary losses would have been on the investors who bought the shares last; namely fellow Indonesian tycoon Samin Tan, who bailed out the Bakrie family by purchasing part of their stake in Bumi PLC for $1 billion when loans to certain private banks fell due last year. This had been done through a bank loan, that would have left Tan nursing losses of over half the amount. Curiously though, Tan promised to remain with his stake in Bumi PLC and effectively allow Bakrie to purchase back their coal businesses for the proverbial song.

Still, Tan seemed to be smiling through it all – and sure enough, the Internet in Indonesia exploded with suggestions that a sweet back deal had already been structured by which (some opined) Berau Coal once purchased by the Bakrie family would be ultimately handed over to Tan.

The other prince

Meanwhile, the other prince was left stewing with the attempted outmaneuvering by the Bakrie family and the resulting losses to both wealth and reputation from the grand failure of the overall deal that would crystallize losses for investors including the Rothschild family.

So he took up the pen again; writing a strong letter to the board through which he resigned as well as assigned blame on the chairman, Samin Tan, for allowing minority investors to get rolled over by the Bakrie family. In effect, the corporate governance allegation must have given Rothschild the perfect excuse to exit the company while (for a later date) giving him an excuse to rationalize if not justify the losses.

Whatever he may try to justify, the cold facts of the day don’t make for good reading: Rothschild lost a bundle but that wasn’t his main issue; it was rather that the fundamental strategy – to purchase undervalued resource assets, improve corporate governance and thereby extract more value – just went to pot grandly.

Along the way, both ego and assumptions were destroyed leaving many a pauper but none the wiser arguably.

Why all the drama

The larger question though begs – why do Asian billionaires need to undertake such risky moves in the first place? Specifically, why is the governance discount so strong in Asia, and how does it get cured over the longer term?

All sorts of reasons are offered, not the least of which is the greater transparency and more intensive reporting requirements in European and US markets that help to avoid the kind of shenanigans some Asian tycoons have become all too famous for. There is a stern accounting type somewhere wagging a finger and saying SinoForest (see Say no to Sino?, Asia Times Online, July 12, 2011) to an eager group of trainees somewhere out there.
Then again, as the various experiences in the West have shown – Enron, Worldcom, Royal Bank of Scotland, Lehman Brothers, UBS, Societe Generale (see The Rogue and the Pogue, Asia Times Online, January 26, 2008) among others – greater transparency isn’t the panacea that champions of these markets like to believe it is. Fundamentally flawed businesses end up lying, and many a time get away for extended periods of time before they are found out. In that respect, there is no difference between such scandals and those that Asia has produced

Another reason is equally germane – large pools of capital in the West such as pension funds, simply aren’t allowed to invest in “emerging” markets, thereby leaving room for such companies to go through overseas listings in order to become more appealing to a wider group of investors.

These are essentially non-tariff barriers for capital; but nevertheless a bill that many investors and companies have been willing to pay for a long time.

However, as the experience of various Asian markets has shown – Tokyo, Seoul, Taipei, Hong Kong and now Singapore; it is indeed possible to grow one’s way out of the discount by resolutely staying on the straight and the narrow. Both market regulators and big Asian businesses would need to resolve to work together and remove the discount gradually.