Bumi – Endgame scenarios

News out today in the press that ol Natty is likely to unveil his alternate plan for his poor fellow Bumi shareholders. Details are still scant but the press seems to think that he has lined up around $270m of capital and that he is to offer to buy the residual stake off Samin Tan in the holding company of Bumi Plc. Recall that Tan holds 23% and paid £11 per share.

Assuming that Rothschild offers the entire $270m to Tan for his 23% then this puts a value on Bumi shares of $1.17bn or around £4 per share.  In contrast, the Bakries are offering by way of equity swaps and residual cash, as detailed in this blog here – http://www.spreadbetmagazine.com/blog/bumi-update-the-market-continues-to-leave-the-sweetie-jar-op.html – around 470p equivalent. Difference being that the Bakries offer is not a clean cash offer for the stock as there is uncertainty about the deliverability of the cash and at the end of the day Tan will still be a minority shareholder in Bumi Plc but with Natty likely back in control. It doesn’t look like Natty wants to simply wind the company up and return the cash with in excess of a 50% loss to his backers in less than 2 years too..

What this does however is provide Tan and the Bakries with a base cash level that they must beat in order to gain complete control of Bumi. We have said all along that the only real way that Tan & the Bakries can disappear into the sunset with the results of the alleged “financial irregularities” under wraps is to offer shareholders a palatable cash exit. £5 per share would probably have the original institutional backers walking away wiping their mouths AND it would allow Tan and the Bakries the opportunity to recoup their investment out of the public eye.

Here’s the endgame scenarios as we see it:-

1. Current Bakrie proposals get approved in full by the Board. This assumes that the financing is available to the Bakries and, adjusted for the outstanding debt, the net cash equivalent remaining in the de facto shell would be around 390p. Probability 15%.

2. Rothschild’s plan succeeds and, assuming it is based on accepting the part of the transaction that involves swapping the PT Bumi & Bakries stock and taking $278m in cash, Tan then takes £4 per share for his 23% stake. This results in a residual value that would be derived from the value of Berau Coal and which would equate also to around £4 per share based on the reduced number of shares in existinse through cancelling the Bakrie stock. Probability 15%

3. The Bakries & Tan make a cash offer for the 54% of Bumi Plc they do not own. This is in fact the only way that the Bakries can wrest complete control of the company and force Natty to sell his stock at the depleted level and equally importantly, bury the investigation (assuming there are no criminal issues) that is presently ongoing. The only way this is going to work is with a figure around £5 per share. Probability 50%

4. The Bakries plan gets approved in part with the PT Bumi share swap and associated $278m payment and the status quo continues re Tan’s holding in Bumi Plc. The problem here is that it is likely that Natty and his backers would then  call an EGM to depose Tan as Chairman given perceived conflicts of interest. Bumi Plc would be left with Berau Coal and a likely rump share value around £4 per share. Probability 15%

5. Nothing happens, the investigation concludes and the company bumbles along as it is. Even here however, the value of Bumi Plc, albeit without the corporate governance discount that would probably still be applied to the equivalent Indonesian main list values of Bumi’s holdings in PT Bumi and Berau, is in excess of the current share price. Probability 5%.

The most interesting element of this whole saga from an event risk play perspective however is that plainly, both the Bakries and Rothschild and also Tan, believe the holdings in PT Bumi and Berau to be worth meaningfully in excess of the current price otherwise why else would you look to buy the holdings? This, is our opportunity.

As ever, the market hates uncertainty and so the discount to all scenarios above remains. If you believe the probability basis I relayed above then Bumi are a raging Buy today. One element in this saga that also has me scratching my head is just what the axe is that the “anal”ysts around at Liberum Capital have to grind and who have been singularly negative on Bumi for months now. Did they lose out at the initial flotation or the current pitching for business? Either way, as with the Soc Gen Lonmin “anal”yst, they each have Xmas cards with egg on the front on their way from SBM!