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UPDATE 3-Indonesia's Bakries propose end to London adventure

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By Janeman Latul and Clara Ferreira-Marques

SINGAPORE/LONDON, Oct 11 (Reuters) - Indonesia's powerfulBakrie family has proposed a parting of ways with financier NatRothschild and Bumi Plc , the London-listed coalconglomerate they co-founded two years ago, after frayed tempersover allegations of financial irregularity.

The proposal by the Bakries to take back their Indonesianassets from Bumi Plc - which could cost the family about $1.1billion - was made to Rothschild and other directors of thecompany on Wednesday night, on the eve of a board meeting inSingapore, sources said.

The last straw might have been an announcement by the Londongroup in September of a probe into potential wrongdoing at itsIndonesian coal mining operations, including PT Bumi Resources, the jewel in the Bakrie crown.

"For the Bakries, they will do anything to defend BumiResources," said a Bakrie insider who was aware of the proposal.

Details in a statement from Bumi Plc outline a separationthat would eventually leave the London firm, whose shares havetumbled since its re-listing last year, without operatingassets, and back at square one as an investment shell.

Bumi Plc said in a statement it was considering theproposal. Details on financing arrangements were not disclosed.

People close to the deal said the Bakries were preparing toborrow up to half the amount required for the deal, possiblythrough financing arranged by Credit Suisse.

Bumi Plc shares were up 18 percent at 2.19 pounds involatile trade after the proposal, but it was far from the 11.65pounds it traded at in July last year.

In Jakarta, shares in PT Bumi Resources were up about 4.4percent.

Under the proposal, the Bakrie family would cancel theirindirect stake in the London-listed group, around 23.8 percent.In exchange, they would get 10.3 percent of PT Bumi, out of astake of just over 29 percent currently held by the London firm.The Bakries would then buy the remaining 18.9 percent of sharesfor cash, before Christmas 2012.

The Bakries have also made a conditional proposal to buy outBumi Plc's 84.7 percent stake in PT Berau Coal Energy ,an associated Indonesian coal miner, within the next six months.Berau shares were up over 15 percent after the news.

<^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^ GRAPHICS: Bumi share price timeline Bumi shareholding structure ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^> BURNT FINGERS A spokesman for the Rothschilds declined comment.

But if the proposal is accepted, indications were the dealwould leave Rothschild and other Bumi Plc shareholders taking asevere hit on their investment.

"Yes, it is an acknowledgement (of defeat)," said one sourceclose to the situation. "But the board spoke to people inIndonesia and realized (given the extent of Bakrie influence incoal-producing regions that) it would never be feasible toexercise full control (over Indonesian assets).

"And if you can't live with the Bakries, there is no futurefor the combined business. No one would want to start from here,but given where we are, this is far from being the worstoption."

The London brokerage Numis said it might be time for theshareholders to cut losses and move on.

"Valuation aside, this looks like good news for Bumi Plc, inour view, as it could walk away with its reputation intact andsome cash in the bank. Losing its main assets would be adisappointment but given the soggy coal markets and dark cloudsurrounding the company, this might be a good way to move on."

The board directors gathered in Singapore includedRothschild, Indra Bakrie, one of the Bakrie brothers, and SaminTan, an Indonesian billionaire who pulled the Bakries back fromdefault last year with a $1 billion investment, only to watchthe value of his shares crumble.

The Bakries and Tan each hold half of a 47.6 percent stakein Bumi Plc, while Rothschild owns 12 percent.

The relationship between Rothschild and the Bakries, one ofIndonesia's most powerful and politically connected families,has soured since the London group's inception, particularlyafter a leaked letter from the financier last November thatcalled for a "radical clean-up" in PT Bumi.

The letter was seen as a sign of his frustration with theBakrie family, whose patriarch Aburizal Bakrie is an Indonesianpresidential candidate.

Tan and the Bakries pushed out Rothschild as co-chairman inMarch and Tan became chairman.

But relations have also frayed between the Bakries and Tan.

Sources have said Tan is "furious" with the Bakries afterwatching the value of his investment plunge.

There was no immediate word on the Bakrie proposal from Tan.

But a source close to the Bakrie family said: "This is aclear message of separation with Tan. We do not live in the sameculture."

PROBE

Bumi Plc's statement on Thursday gave no update on the probeinto irregularities, being led by a London law firm and still inprogress. The investigation had revived worries over governanceat Bumi Plc and concerns over the woes of its debt-burdenedaffiliate, Bumi Resources.

Most of the allegations of financial irregularity, expectedto total more than $500 million, relate to Bumi Resources, theflagship Bakrie miner and Indonesia's largest coal producer. Twoof three investments at the centre of the probe, though, havealready been written down to zero by the London parent.

"While we are not able to quantify the amounts involved inthese irregularities, we believe this investigation mayreinforce the idea that the company needs to address its complexcorporate structure," analysts at JP Morgan, the bank thatfostered the creation of Bumi, said in a note last month.

Bumi was listed in London last year via a reverse takeoverengineered by Rothschild that aimed to create an internationalcoal-mining powerhouse with operations in Indonesian Borneo, andone of the biggest listed companies on the London exchange.

The deal highlighted the promise of Indonesia, SoutheastAsia's biggest economy, which boasts some of the world's largestdeposits of coal, gold, copper, tin and natural gas, spreadacross an archipelago of 17,000 islands.

But it also highlights risks of investing in a nation wherecorporate governance can be spotty, and powerful localconglomerates able to use local connections to protect theirinterests.

(Additional reporting by Saeed Azhar; Editing by RajuGopalakrishnan)

((Raju.Gopalakrishnan@thomsonreuters.com))

Keywords: BUMI/