KazMunaiGas EP Investors Vote Against State-Buyout Proposals

  • Independent directors say offer from Kazakh producer too low
  • Vote comes ahead of planned privatization of parent company

Minority shareholders in KazMunaiGas Exploration Production JSC voted down proposals that would have cleared the way for a buyout by Kazakhstan’s national oil producer, a deal opposed by the listed company’s independent directors and some investors.

KMG EP said that 75.7 percent of the shareholders voted against “resolutions 1 and 2 regarding introduction of changes and amendments to the relationship agreement and charter,” according to a regulatory filing Wednesday. Without the minority shareholders’ endorsement, the offer won’t go ahead, parent company KazMunaiGas National Co. said in statement.

The proposal faced resistance even after KazMunaiGas National raised its offer to $9 per global depositary receipt from $7.88 last month. That price still undervalued the company, the independent directors of KMG EP said. Before the slump in energy prices two years ago, London-listed GDRs of KMG EP were trading at twice the level of the buyout offer.

The vote comes as the Kazakh government prepares an unprecedented state asset sale to help plug gaps in the budget after a slump in commodities prices and attract more capital into its economy. After the buyout proposal was blocked, the state oil company needs to restore the confidence of international investors ahead of its own planned privatization, said Johan Elmquist, a manager at Tundra Fonder AB in Stockholm.

“The struggle will continue,” said Elmquist, who has a small stake in KMG EP and did not vote. “For Kazakhstan a bigger issue is how Kazakhstan is perceived as a market for international investors.”

State Control

Previous takeovers of Kazakh resource producers had left investors with losses. After the 2013 delisting of Eurasian Natural Resources Co., backed by the state and the mining company’s founders, shareholders received less than half the initial public offering price.

“We think it is very cheap to sell at these levels as shares are worth a lot more,” Ivan Mazalov, who helps manage about $2 billion of assets at Prosperity Capital Management Ltd., said before today’s result.

KMG EP is one of the top three Kazakh oil producers, with output of 246,000 barrels a day of crude oil in the first half and reserves of 1.4 billion barrels at the end of 2015, according to its website. Shares are listed on the Kazakhstan Stock Exchange and GDRs on the London Stock Exchange. The parent company held 57.9 percent of total shares at the end of March, according to its website.

Privatization Plan

The buyout offer would have boosted state control over the unit before the Kazakh government sells shares of the parent as part of its privatization program starting in 2018. Authorities in Kazakhstan, which relies on crude for 50 percent of budget revenue, plan to sell a number of state assets over the next two years.

Seven sales, including uranium producer Kazatomprom Natsionalnaya Atomnaya Kompaniya AO and railway monopoly Kazakhstan Temir Zholy National Co. JSC will take place via initial public offerings, Kazakhstan’s sovereign wealth fund Samruk-Kazyna said in May.

Weaker Protections

Independent directors of KMG EP have been fighting the buyout since November, renewing their call on July 13 for shareholders to reject the move at Wednesday’s meeting. The parent company’s proposed buyout and other amendments to the shareholder agreement would weaken protections for minority investors and aren’t required to achieve performance improvements, they said.

Advisory firms Institutional Shareholder Services and Glass Lewis both recommended that investors vote against the proposal.

The proposal would have set a bad precedent and undermined investor interest in the country, Mazalov said by phone Tuesday.

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