Kazakhmys Holders Seen Approving ‘Value-Destructive’ ENRC Deal

Kazakhmys Plc investors will probably endorse the sale of its stake in Eurasian Natural Resources Corp. to ENRC’s founders for want of an alternative exit, Nomura International Plc and Macquarie Group Ltd. said.

“Kazakhmys’s independent shareholders will likely approve the sale despite it being value-destructive,” said Patrick Jones, an analyst at Nomura. There’s “a lack of strategic options and very low probability of alternative offers.”

ENRC’s three founders have offered to buy Kazakhmys’s 26 percent stake as they seek to take the ferrochrome company private. While the transaction would allow Kazakhmys to boost cash and cut debt as it seeks to return to profit, the copper miner may have to book impairment charges, adding to a $2.2 billion writedown on its ENRC stake in March.

The founders -- Alexander Machkevitch, Patokh Chodiev and Alijan Ibragimov -- bid $2.65 in cash and 0.23 of Kazakhmys stock for each share. That’s equivalent to 234.3 pence a share, valuing ENRC at 3 billion pounds ($4.6 billion), they said. They sold shares at 540 pence in an initial public offering in 2007.

Kazakhmys shareholders will vote Aug. 2 on the proposal, which would earn Kazakhstan’s largest copper producer $875 million in cash and about 77 million of its own shares. The company plans to cancel the stock, increasing its free float, or publicly available shares, to 58 percent from 37 percent.

Challenging Outlook

“Despite the cash boost and share cancellation from the ENRC offer, the outlook for Kazakhmys going forward remains challenging,” Nomura’s Jones said in a note. He lowered his price estimate to 130 pence from 450 pence citing “tight margins, strained balance sheet, and unattractive valuation.”

Kazakhmys Chief Executive Officer Oleg Novachuk, former Chairman Vladimir Kim and Executive Director Eduard Ogay, who together own about 36 percent of the copper company, have backed the deal, which it says could reduce debt by 76 percent.

“Given the state of ENRC and the multiple headwinds the company faces at present, we believe this transaction offers the only realistic exit opportunity for Kazakhmys from their ENRC stake,” Alon Olsha, an analyst at Macquarie, said in a note. “Independent Kazakhmys shareholders have little choice but to vote in favor.”

Kazakhmys in March wrote down its stake in ENRC after the carrying value fell to 375 pence. A further impairment is likely after the transaction, according to Liberum Capital Ltd.

“The market may have been hoping for better deal terms,” Ash Lazenby, a Liberum analyst, said June 24 when ENRC’s founders announced the offer. “Given Kazakhmys holds its ENRC stake at 3.75 pounds a share on its book, completion of the deal would also result in a writedown.”

Three Resolutions

Kazakhmys investors will vote on three resolutions at the Aug. 2 meeting, and the transaction will proceed only if all are approved. The “whitewash waiver” resolution, which allows its main shareholders to raise their total stake to 42 percent from 36 percent without having to bid for the rest, requires a simple majority of independent shareholders, meaning more than 50 percent of the investors would be able to block the ENRC deal.

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. The U.K.’s Serious Fraud Office said in April it began a probe into alleged fraud and bribery at London-based ENRC’s operations, including in the Democratic Republic of Congo.

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