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JAKARTA/LONDON (Reuters)- It was supposed to be a union of two legendary business dynasties, one West, one East. Nathaniel Philip Rothshild, the 40-year-old scion of the storied European banking family, forged a deal a year ago with the Bakrie brothers, one of Indonesia's mightiest business families, to create an international coal-mining titan.
That deal last November seemed incredible from the start; the dream of creating the world's biggest thermal coal company, with mines in Indonesian Borneo, and aiming to be one of the biggest listed companies on the London exchange. Now a year later the partnership could be on the brink of collapse.
This week Rothschild called for a "radical cleaning up" of the balance sheet and corporate culture at the Bakrie brothers chronically indebted flagship, PT Bumi Resources, his partner in the London-listed coal venture, Bumi Plc.
In a letter written to Ari Hudaya, Chief Executive of both Bumi Plc and Jakarta-listed PT Bumi Resources, Rothschild said the partnership's goal of entering the FTSE-100 in 2012 was still attainable. But he was not satisfied with progress so far with his Indonesian partners, who remain "over-leveraged," which was a major factor in the "corporate governance discount" on the Jakarta's firm's stock price.
The leaked letter was a stunning rebuke to top Bakrie lieutenant Ari Hudaya. Hudaya's dual role as CEO of both the Bakries' PT Bumi Resources and the Bumi Plc joint venture required "closer evaluation and scrutiny," Rothschild wrote in the letter, published on the Financial Times website.
Rothschild knew he was dealing with one of Southeast Asia's most powerful and controversial families, and one with chronic debt issues. Over the past two decades, he has flirted with risk and emerging market powerbrokers, ranging from an oil venture in Iraqi Kurdistan to a friendship with Muammar Gaddafi's son Saif al-Islam, who has been trying to flee Libya after the death of his father.
In the process, Rothschild has shed the party-hard reputation of his university years -- the Sunday Times Rich List anointed him Britain's richest hedge fund manager and he is estimated to be worth around a billion pounds. He has emerged as a serious dealmaker with a contacts book to rival that of his father, Baron Rothschild, and spends the equivalent of around a month each year in his private jet "N4T."
On the Indonesian side, Aburizal Bakrie, the oldest of the brothers, headed the group until 2004, when he joined President Susilo Bambang Yudhoyono's administration. He left after repeatedly clashing with reformers in Yudhoyono's government and now heads Indonesia's biggest political party, Golkar. He is a likely presidential candidate in the 2014 Indonesian elections.
The strain in relations between the future Baron Rothschild and a family that may boast a future president after their hopeful beginning a year ago illustrates some of the difficulties in doing business in Indonesia.
Southeast Asia's largest economy is brimming with opportunities, though it does means navigating through opaque regulations, erratic business relationships, changing policies and deeply entrenched corruption. The World Bank ranks it 129 out of 183 countries in ease of doing business.
For the Bakries, the allure of the deal with Rothschild was to get that prized listing on the London exchange. As Rothschild noted in his letter, their shares on the Jakarta exchange have underperformed, despite the attractiveness of the coal assets.
Rothschilds' company Vallar became Bumi Plc and was relisted on the London Stock Exchange in June -- just ahead of a global market sell-off. The stock dropped steadily from the start as markets fell, until it hit 8.50 pounds. That price triggered a margin call from Bakrie lenders who demanded repayment on loans worth $1.3 billion.
The Bakries brought in a new investor at the end of October to fix that problem, Indonesian coal miner and investment banker Samin Tan. They sold half their original 47 percent stake in Bumi Plc to Tan in a complex deal that featured special purpose share-holding vehicles.
The deal did not dilute Rothschild's 10 percent stake in Bumi Plc, and Rothschild in his letter said he fully supports Tan's entrance into the partnership. What he objected to, Rothschild said, was that Hudaya had refused to call in Bumi Resources' own loans to others to repay debt. Bumi Plc owns a 29 per cent stake in PT Bumi Resources, which in turn controls the lucrative mines.
Chris Fong, a spokesman for the Bakrie family, told Reuters Rothschild's letter had taken them by surprise.
"Nat Rothschild hasn't addressed these issues with us," Fong said, referring to a passage in the letter in which Rothschild said the Bakries also wanted a transformation in the management of Bumi Resources.
"If he wants to raise any issues, as a shareholder and board member, we would expect him to follow accepted corporate governance procedures and raise concerns at the board level and at the appropriate time."
The two sides, according to knowledgeable sources in both camps, had been taking each other by surprise of late.
Rothschild, thousands of miles away in Europe, had called the Bakries after Reuters first broke news in late October of an impending deal with Tan, but he could get no confirmation of the deal.
"The family left Rothschild in the dark until the news that Samin Tan was nearing a deal and he called the family about it," said a source close to the Bakries with direct knowledge of the situation. "The group didn't think he needed to know about this, that he should only know when a deal was done."
Eton-educated Rothschild insisted in an interview last month with Reuters that he had no issue with the Bakries, and that he had "total confidence" in the family.
The latest turns in the Bakries' fortunes seems to be following a script written three years ago during the 2008 global financial crisis. They fended off a $1.2 billion margin call then by selling stakes in group firms, many of them with buy-back clauses, to lenders and investors.
Like then, the Bakries' latest debt refinancing also ensured the prized Borneo mines would remain in Indonesian hands.
Indonesia has some of the world's largest deposits of coal, gold, copper, tin and natural gas, spread across the archipelago of 17,000 islands. The legacy of harsh colonialism by the Dutch for over three hundred years has left many Indonesians with a distrust of foreign motives.
The Borneo coal mines at the heart of the deal with Rothschild once belonged to global energy companies Rio Tinto, BP and BHP Billiton, who sold them to the Bakries in 2001 and 2003, after coming under pressure from resource nationalists to divest their assets to local interests.
"Our contacts at the time told us these deals undervalued the companies at pennies on the dollar," said the U.S. Ambassador to Indonesia, Cameron Hume, in a November 2007 classified diplomatic cable released by Wikileaks. Bakrie group executives, Hume added, have said they hoped to do more of these "value-oriented acquisitions."
"In the mining sector, cabinet minister Aburizal Bakrie has been most successful in using nationalism for his private personal gain," Hume noted in that cable.
Aburizal Bakrie's Golkar party at the time was making resource nationalism an issue in the run-up to the 2009 presidential election, threatening to review energy contracts with foreign oil companies.
So it caused ripples of surprise and interest when Nirwan Bakrie celebrated his 59th birthday last year by announcing that the coal assets held by PT Bumi Resources would be injected into Rothschild's London-listed investment vehicle Vallar.
Rothschild put up 100 million pounds of his own money, but the new company's biggest asset would seem to be worth the price. The KPC mines in East Kalimantan province in Indonesia's part of Borneo island are among the world's largest open pit mines, with 4.5 billion tonnes of proven reserves. Bumi Plc expects coal sales this year of 77 million tonnes, which would make it the world's largest thermal coal exporter.
"What we are creating here is the largest exporter of thermal coal to China," Rothschild, whose ancestors advised generations of European royalty and helped to bankroll Britain's war against Napoleonic France, declared at the time.
For Rothschild, the venture was an opportunity to become a key player in the global coal industry, and to cement his image as a buccaneering financier in the mold of his 19th Century forbears.
For the Bakrie family, who escaped financial collapse twice before in 1998 and 2008, the London listing gave it instant credibility and a global profile.
"We needed the London listing to establish a presence in the international capital market ... we wanted to show the world that Indonesia owns a global champion in coal," Nirwan Bakrie told Reuters in Jakarta last month.
But not long after that hopeful beginning, seeds of mistrust were sown. In March, three months before Bumi Plc's London listing, the Bakrie group's holding company, Bakrie & Brothers, along with affiliated firm Long Haul, consolidated some of their debt through a $1.35 billion loan arranged by Credit Suisse and backed by their stake in Bumi Plc.
Rothschild and his advisors asked for the details at the time but were told those were private and had no relevance to their joint venture in Bumi Plc, sources close to the Bakrie family said.
By early October, Bumi Plc's falling share price triggered the margin call on that loan, plunging the Bakries into a new debt crisis and ultimately leading to the Tan deal.
According to several sources close to Bakrie family, the Bakries believed Rothschild was ready to buy their now cheapened stake in Bumi Plc if the group was pushed into default.
"He already was looking for a new local partner to replace the Bakries here ... but the coal mining world is small in Indonesia and those local partners declined to do a deal with him," one source said. "I think this guy is not a good partner."
The Rothschild camp denies those claims.
With the mistrust apparently deepening, Ari Hudaya, the CEO of Bumi Resources and Bumi Plc and the target of Rothschild's disgruntlement in his letter, called Rothschild on October 17 on his Blackberry.
He had just met with the Bumi Resources board inside the Bakrie Tower in Jakarta's financial district, whose dark tinted windows afford views of a volcano outside the capital. They had decided to cancel a $2 billion deal announced in June that would have given Bumi Plc 75 percent of Bumi Resources Minerals (BRM), the Bakries' latest mining exploration venture, with promising assets from copper and zinc in the jungles of Indonesia to African diamonds.
Bumi Plc said later in a regulatory announcement from London the deal was canceled due to "continuing market uncertainties," which was affecting the share prices of the companies involved.
The decision left Rothschild with a less diversified mining firm, and closing off what seemed an easy and promising entrance to new mining frontiers.
The Bakries had first tried to do a loan deal with Glencore, Reuters reported last month. The commodity trading giant was keen to get a tighter grip on their Indonesian coal marketing rights and keep out rival trader Vitol.
But because lenders wanted the deal to involve an equity stake, the Bakries turned to Tan, who controls Borneo Lumbung Energi and investment bank PT Renaissance Capital. The two sides were no strangers, since Tan had advised the Bakries on their 2003 mine purchases and then tried to buy Bumi's key mines himself in a failed deal several years ago.
Like the Bakries, Tan comes from Sumatra, born into a family of fish traders. He was a partner at accountancy firm Deloitte, before setting up his own investment firm.
"The deal is not only about Bakrie," Tan told Reuters, when asked about the risk of any deal with the Bakries, adding he had prepared some "safety measurement."
Investors were not impressed, given that Tan is financing it with a loan from Standard Chartered that boosts his Borneo Lumbung Energi's debt profile. The firm's stock crashed as much as 17 percent on the day of the deal, and several banks have since downgraded their investment ratings on the miner, from "buy" to "hold" or "reduce."
Investment banks have said it shouldn't not hurt Bumi Plc, and the London stock has steadied this month along with the rest of the market.
Weeks before his scathing letter to his Indonesian partner, Rothschild had told Reuters he was confident he would continue to have a relationship with the Bakries for a long time to come.
"In 10 years' time, I expect to still have the same type of strong and trusting relationship that I have with the Bakries today."
Saeed Azhar reported from SINGAPORE; Additional reporting by Prakash Chakravarti in HONG KONG and Jackie Cowhig in LONDON; Writing by Neil Chatterjee; Editing by Bill Tarrant