ENRC ‘Very Disappointed’ by Bid Valuing It at $4.7 Billion

A Eurasian Natural Resources Corp. independent committee set up to assess offers said it can’t recommend that shareholders accept a bid from the founders and the Kazakh government that values ENRC at $4.7 billion.

“The Independent Committee is very disappointed by the value of the offer, which it believes materially undervalues ENRC, its fundamentals, the intrinsic value of its underlying assets and its growth prospects,” Mohsen Khalil, the committee’s head, said in a statement today.

The proposal by Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov to take the mining 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. It is equivalent to 234.3 pence a share and values ENRC at 3.04 billion pounds, it said. 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. Today’s offer is lower than a May proposal of 260 pence a share that ENRC directors also said was unacceptable, the committee said.

“The Independent Committee cannot recommend the offer to relevant ENRC shareholders at the current level,” it said.

Ore, Power

ENRC mines iron ore, produces ferroalloys used in steelmaking, generates power in Kazakhstan and extracts metals in Africa. The stock has dropped about 50 percent in the past year amid allegations of corruption at its operations in Kazakhstan and Africa.

Analysts at Nomura Holdings Inc. value the company’s Kazakh business at more than $11 billion and its African unit at $1.8 billion. It had net debt of $5.5 billion as of March 31.

In the event that Kazakhmys shareholders give their consent and the offer becomes unconditional, the committee would advise ENRC shareholders on the consequences, it said.

Vladimir Kim, the former chairman of Kazakhmys, Chief Executive Officer Oleg Novachuk and Executive Director Eduard Ogay gave their irrevocable support for the offer, Kazakhmys said in a separate statement. They own a total of about 35 percent of Kazakhmys, data compiled by Bloomberg data shows.

Kazakhmys shareholders will vote on the bidding group’s offer, which requires a simple majority to be accepted, Kazakhstan’s largest copper producer said, without giving a date for the ballot.

Better Terms

ENRC declined 1.4 percent to 213.8 pence at the close in London while Kazakhmys slid 13 percent to 233.7 pence, the biggest slump since May 2009.

“We believe the market may have been hoping for better deal terms,” Ash Lazenby, a Liberum Capital Ltd. analyst, wrote in a note. “Given Kazakhmys holds its ENRC stake at 3.75 pounds a share on its book, completion of the deal would also result in a write-down.”

Kazakhmys will receive $887 million and 77 million of its own shares under the offer terms, it said in a separate statement today. Kazakhmys’ free float will increase to about 58 percent from about 37 percent, it said.

“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. The Kazakhmys board recommended its shareholders vote for the offer to avoid the risk of a “further erosion in value.”

Kazakh Privatization

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.

Cobalt Deposits

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.

The figure represents a “small share” of total losses as state-owned companies under priced 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.

ENRC shareholders who don’t tender their shares in the offer will remain stockholders in a private company should the deal succeed, because the founders plan to delist it from the London Stock Exchange, according to the bidders’ statement.