Why Bumi shareholders should be wary of ‘back Nat’ campaign

The last thing coal mining firm needs is return of its creator, Nat Rothschild

Bumi has done enough damage already to its shareholders’ wealth and the reputation of the London stock market. The last thing it needs is the return of its creator, Nat Rothschild.

Astonishingly, however, a couple of big-name City fund managers, including Schroders’ Richard Buxton, have declared themselves backers of Rothschild’s plan to throw out 12 of 14 current directors and install himself and a hand-picked crew in their place. These outside shareholders should pause and recall how Bumi, an adventure into the exciting world of Indonesian coal mining, fell into its deep hole. Short answer: Rothschild did a spectacularly bad deal.

Remember the history. In 2010 Rothschild created a shell company, Vallar, and raised £700m to seek riches in natural resources. A partnership deal soon followed to buy into Indonesian coal mines controlled by the Bakries, a family who had not always generated headlines that reassure strait-laced institutional investors in London. The Bakries would own 47% of London-listed Vallar, to be renamed Bumi, but that apparently wasn’t a problem because everybody would get along just fine.

Ho, ho. Bumi has been one quarrel after another. Rothschild, having ceded the right to appoint the chairman and chief executive of the London-listed company, discovered he in was no position to call the shots, notwithstanding the force of his understandable complaints about governance at the Indonesian end. He quit the board last October.

Given the farcical chain of events, and a share price down 70%, one can understand why Rothschild would be embarrassed and wish to play a role as salvage man, or the person to oversee the unwinding of the cross-shareholdings with the Bakries.

But it’s a mystery as to why Schroders, owner of 4% of the shares, think he’s suitable.

Sir Julian Horn-Smith, the ex-Vodafone man who is Bumi’s senior non-executive director, should have known better than to get involved in the first place. But he was spot-on this week when he said Bumi’s governance, operational and legal headaches “essentially derive from the original deal that Nat Rothschild was instrumental in putting together”.

For good measure, Horn-Smith reminded investors that the Takeover Panel, the City’s watchdog on deals, is investigating why the existence of a concert party between the Bakries and a firm controlled by fellow Indonesian Rosan Roeslani wasn’t declared on day one. His statement continued: “The board notes that the next stage of the panel investigation will be to establish any culpability and appropriate disciplinary action, which the board assumes will include a focus of Vallar plc’s principal adviser at that time, Vallar Advisers LP, which was led by Nat Rothschild.”

At the very least, outside shareholders should have taken that as a warning to reserve judgment on Rothschild’s attempted return until the panel has spoken. Instead, a “back Nat” campaign is up and running. Baffling.

Has Lloyds time finally come?

Rejoice, fellow shareholders, our punt on Lloyds Banking Group is going well – or, at least, less badly. The best-performing FTSE 100 stock of 2012 (it doubled) has started 2013 at electric pace, up 10% so far to 54p amid the general market optimism.

It’s time to dream. The state’s in-price on the £20bn bailout of Lloyds was 63p if one takes account of the £2.5bn returned to public coffers via the bank’s exit from the asset insurance scheme. Suddenly break-even on our 39% shareholding doesn’t seem far away.

UK Financial Investments, the body charged with managing the state’s bank holdings, needs to awake from its slumber – there could be a selling opportunity here for the government. You can hear the refrain now: Labour nationalised banks in a crisis; we’ve brought them back to health and can start repaying the taxpayer. That’s a decent line for a chancellor who may soon find the UK stripped of its triple-A credit rating as the economy enters a triple-dip recession.

How, you might wonder, have Lloyds’ shares risen from 22p in the autumn of 2011 in such a cold climate? Isn’t the bank, as the country’s largest mortgage lender, a proxy for the health of the UK economy? Yes, but there has always been another argument: Lloyds is so big and dominant in domestic savings and loans that it can’t fail to make a shed-load of money one day.

The latter thought is now uppermost, especially as the banks have had a few presents recently – liquidity rules have been loosened and the Bank of England’s funding for lending scheme is in full swing. “Normal service is being resumed,” declared UBS’ bank-watcher this week. He has a 12-month target price on the shares of 60p and thinks Lloyds “is clearly going to deliver rising margins, falling costs and falling provisions which should provide a very strong upswing to profitability and earnings per share momentum over the next few years.”

But here’s the trickier part for the government: mere break-even for the public purse could imply an almighty windfall for Lloyds management. It’s a function of the V-shaped path of the share price and the fact that the lucky Lloyds crew got a bundle of incentive shares near the bottom. An announcement last March recorded carrots that included 41.3m shares for the top executives – the quantity was calculated on the basis of a 34.8p share price. Some 9.5m shares were allocated to chief executive António Horta-Osório and the rest split between nine individuals.

Performance conditions and deferral provisions, and all that, apply. But throw in other incentives and assume Lloyds gets back to the 63p starting point. The back-of-envelope maths suggests the top 10 Lloyds executives could be looking at share-based rewards worth £35m-£40m between them, even at the point where the state’s profit is zero.

Them’s the rules of the incentive scheme agreed by UKFI, of course, and maybe the voters would just be thankful for Lloyds’ recovery. Or maybe they would point out that “ongoing regulatory largesse”, in the cute phrase of another City analyst, is a large part of this story. That fun lies ahead – but maybe sooner than assumed.

Unexpected CVs in the bagging area

An intriguing whisper from the boardroom of a quoted-company retailer: they have been astonished by a flood of unsolicited job applications from Tesco executives in recent months. These are not from members of Tesco’s high-ranking executive committee – we’re talking levels below that. What does it mean? Tesco’s chief executive, Philip Clarke, is cracking the whip, as you’d expect, but the post-Leahy internal revolution may not be universally acclaimed.

‘Tis the season to stay silent

As Marc Bolland at Marks & Spencer might agree, retailers’ Christmas trading statements are more trouble than they’re worth. What’s the point? They give bald sales numbers, which can be misleading in isolation. Sales are vanity, profits are sanity, is the old retailing wisdom.

Next is the exception. It helpfully updates its profit forecast. The rest boast about how many mince pies they sold and, in case of Sainsbury’s and Tesco, they bicker about the right way to calculate like-for-like sales figures.

True, Christmas is critical for shopkeepers. But an overload of reporting, it is now widely agreed, distracts managements and encourages short-term thinking. Cut the clutter: if a retailer has real seasonal news to convey, good or bad, let it speak; if not, it should stay silent until the next scheduled results.

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