London-Listed Company’s Slump Draws Attention to the Bakrie Family

on Aug 7, 2012

Recently, the Financial Times published an article about the famous Indonesian Bakrie dynasty which investors generally associate with the London-listed coal company Bumi Plc (BUMI). The company was the second-worst performer in the FTSE 350 index for the first half of 2012, which in turn has drawn attention to the Bakrie family.

The Bakrie brothers have gained certain notoriety, with their oil and gas company Lapindo Brantas largely blamed for the 2006 eruption of a mud volcano in East Java, which caused significant devastation and loss of life. As reported by the FT, in 2008, research by British and US academics indicated that mudflow was caused by drilling negligence rather than natural causes.

Although the Bakrie family never agreed that it was their drilling that triggered the eruption and the subsequent devastation, they nevertheless offered to pay $750 million to settle the claims of tens of thousands of people. The FT reports that in 2010, payments to the mud volcano victims started to become irregular, with the family acknowledging that it has still $95 million in outstanding payments to be made.

!m[](/uploads/story/232/thumbs/pic1_inline.png)The Bakrie saga might have remained purely Indonesian, if it weren’t for the coal operations company Bumi Resources, which debuted on the London Stock Exchange in 2011. According to the FT, Bumi owns 29 percent of Indonesia’s largest coal mine, which in turn is controlled by the Bakries. The company attracted investors with its prospects backed by bankers JPMorgan (JPM) and ex-hedge fund manager Nathaniel Rothschild, who at the time said he wanted shareholders to make “two or three times their money”.

Bumi Resources, however, did not live up to expectations, with its share price going down 77 percent from its peak in April 2011. Among the reasons for the company’s weak performance are the plummeting price of thermal coal and the global economic downturn as well as corporate governance in other areas of the Bakrie family business. Investor disappointment influenced Mr Rothschild himself, with the FT reporting that in November 2011 he wrote a letter complaining that the company had too much expensive debt and calling for a “radical cleaning up”. The Bakrie brothers responded by removing Mr Rothschild as Bumi co-chairman.

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The Bakries then had to sell half of their Bumi shares to the Indonesian entrepreneur Samin Tan, as they were no longer able to maintain the collateral on a $1.34 billion loan which they had guaranteed with Bumi shares.
And while the move reduced the family’s outstanding loan to $437 million, the FT reports that piling up debt to buy more assets without maintaining sufficient cash reserves seems to be a family tradition. The FT quotes Bobby Gafur, chief executive of the family’s holding company Bakrie and Brothers (BNBR), who noted that a decades-old leveraging strategy has led to numerous debt crises.
The Bakrie dynasty expanded from humble beginnings in 1942 as a small trading company into a conglomerate, with its strategy consisting of buying sprees backed by pledging assets as collateral to secure more loans and then buying more assets. The Bakries’ business expanded rapidly in the 1990s, however, the 1997 Asian financial crisis left the group with a balance sheet reading $1.1 billion debt.
In the 2000s, the Bakries shifted their focus into mining and natural resources, acquiring mines which were later absorbed into Bumi Resources. The company, however, was hit by the 2008 global financial crisis, and share prices collapsed. This did not stop Bumi Resources from expanding, as the company bought stakes in three coal mining companies with close ties to other enterprises of the Bakrie family.
The FT reports that it is hard to say how much the Bakries actually owe, quoting Chaim Estulin of the Debtwire news agency, part of the FT Group, who notes that that investors cannot estimate how much the Bakrie family borrows against its assets.
As for Bumi Resources, hopes are now pinned on Mr Tan, who is expected to improve efficiency and revive share prices. Mr Tan, whose coal-mining company Asmin Koalindo Tuhup is being investigated by the Indonesian forestry ministry for allegedly violating its production permits, seems quite hopeful about Bumi. “If you ask me if we’re worried, I say no. Because if we were worried, we wouldn’t have gone into the deal,” he says as quoted by the FT.

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