Eurasian Natural Resources Corp. (ENRC)’s founders and the Kazakh government will offer a mix of cash and Kazakhmys Plc (KAZ) shares to buy ENRC in a bid that values the mining company at 3.04 billion pounds ($4.7 billion).
The proposal by Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov to take the company private would pay shareholders $2.65 in cash and 0.23 of Kazakhmys Plc stock for each ENRC share held, the newly created Eurasian Resources Group BV said in a statement. Kazakhmys, which owns 26 percent of ENRC, said it backs the bid.
The founders are seeking to take ENRC off the market five years after selling shares in the company at 540 pence apiece in a London initial public offering. The stock has dropped about 50 percent in the past year amid allegations of corruption in Kazakhstan and Africa. Today’s offer is effectively lower than a May proposal that ENRC directors said “materially undervalues” the company, Nomura International analysts said in a note.
Kazakhmys shares dropped as much as 15 percent to 230 pence pence in London trading, the biggest intraday slump since December 2008, and were at 237.7 pence by 9:51 a.m. ENRC was 1.1 percent higher at 219.3 pence, after falling as much as 7.8 percent.
“We believe the market may have been hoping for better deal terms,” Ash Lazenby, a Liberum Capital Ltd. analyst, wrote in a note.
The offer for ENRC, which mines iron ore, produces ferroalloys used in steelmaking, generates power in Kazakhstan and extracts metals in Africa. In 2010, it took control of copper and cobalt mines that equivalent to 234.3 pence a share at current exchange rates, according to the statement. ENRC closed June 21 at 216.90 pence a share in London, giving the iron-ore and ferroalloys producer a market value of 2.79 billion pounds, and Kazakhmys at 269.4 pence. The ENRC committee of independent directors has yet to give the offer its approval, Eurasian Resources said.
“The Founders and the Kazakh government are confident of the underlying quality and overall potential of ENRC’s key businesses,” the bidding group said. “They believe that the value of ENRC will only be fully realised if ENRC is no longer a listed company.”
Kazakhmys will receive $887 million and 77 million of its own shares under the offer terms, it said in a separate statement today.
“The board of Kazakhmys believes that the offer may undervalue ENRC and its assets, but after seeking to engage with the ENRC consortium and its constituent members, has concluded that there is no prospect of obtaining improved terms,” it said. “Moreover, the board considers the prospects of realising greater value from ENRC in the short to medium term to be remote and the risks of further erosion in value to be considerable.”
The founding shareholders and Kazakh government, which hold almost 54 percent, sent a letter in May to an independent committee set up by ENRC’s board detailing a cash offer at 175 pence, equal to $2.65 at the time, plus 0.231 share of Kazakhmys. That was equivalent to 260 pence a share based on a 370-pence Kazakhmys price, the panel said May 20, concluding that the offer “materially undervalues” ENRC.
Given that Kazakhmys stock has fallen since the initial proposal, this leaves the latest offer effectively lower, the Nomura analysts said.
ENRC traces its roots to its founders’ participation in the 1990s privatizations of Kazakh state assets that were gradually combined into a single group of companies and listed in London.
Mehmet Dalman, named chairman in 2012 to improve governance and lead a reorganization following the corruption allegations, resigned in April and was replaced by Gerhard Ammann, former chief of Deloitte & Touche LLP’s Swiss practice.
The U.K.’s Serious Fraud Office said April 25 it began an investigation into alleged fraud and bribery at London-based ENRC operations, including in the Democratic Republic of Congo.
In 2010, ENRC took control of copper and cobalt mines in Congo that Israeli billionaire Dan Gertler acquired from the nation’s government following their seizure from Canada’s First Quantum Minerals Ltd. Anti-corruption groups including Global Witness criticized ENRC for acquiring the assets, saying Gertler got them at low prices because of close ties to President Joseph Kabila. Gertler denied buying them at below-market rates.
First Quantum sued ENRC, which settled in 2012 and agreed to pay $1.25 billion for First Quantum’s share of the assets. In May, the African Progress Panel said in a report that the DRC lost out on about $1.4 billion in revenue by selling undervalued copper and cobalt deposits now controlled by ENRC and Glencore Xstrata Plc. (GLEN)
The figure represents a “small share” of total losses as state-owned companies underpriced assets that they sold to companies owned by Gertler from 2010 to 2012, according to the panel led by former United Nations Secretary-General Kofi Annan.
The founders are raising $1.6 billion to fund the cash component of the buyout, and the government is offering its 26 percent stake in London-based Kazakhmys, people familiar with the matter said last month, asking not to be identified because the information wasn’t public.
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