LONDON A $4.7 billion bid by the founders of ENRC ENRC.L to buy out the Kazakh miner has gained support from the board of top shareholder Kazakhmys (KAZ.L), paving the way for the trio to take the company private after almost six turbulent years.
ENRC's three founders, Alexander Machkevitch, Alijan Ibragimov and Patokh Chodiev, along with the Kazakh government, are seeking to acquire the roughly 46 percent they do not already control, and on Monday they confirmed a bid in cash plus the government's shareholding in Kazakhmys. They had until 5 p.m. (1600 GMT) to either make a firm offer or walk away.
Kazakhmys has long sought to resolve its troublesome 26 percent stake in ENRC and its support is key for the billionaire trio, who want to draw a line under a London adventure marred by corruption probes, governance concerns and boardroom rows.
The suitors - renamed Eurasian Resources - said they would offer $2.65 in cash plus 0.230 Kazakhmys shares per ENRC share, a value of 234.3 pence in total. The offer was unchanged in structure but lower in absolute terms compared with a proposal sketched in May, due to a sharp drop in Kazakhmys shares.
ENRC's independent directors said they were unable to recommend a bid that left them "very disappointed" and "materially undervalues ENRC, its fundamentals, the intrinsic value of its underlying assets and its growth prospects".
But in the end, that is unlikely to determine ENRC's fate.
Thanks to the limited number of ENRC shares that are freely traded, it will be Kazakhmys shareholders and not ENRC's independent directors that hold the casting vote. Kazakhmys's support alone will take the bidders to 80 percent.
Two of Kazakhmys's largest shareholders, former chairman Vladimir Kim and Chief Executive Oleg Novachuk, have given their backing to their own board's approval of the ENRC bid. But voting structures mean the deal will need to be supported by the majority of Kazakhmys minority investors.
Independent shareholders will be voting on the deal itself but also, critically, will be alone in voting on a waiver for Kim, Novachuk and smaller shareholder Eduard Ogay whose increased holdings as a result of the share slice of the deal would normally trigger a mandatory buyout.
END OF THE AFFAIR
Kazakhmys's board, in backing the bid on Monday, said it had sought to increase the cash portion of the offer but failed.
The bid was, it said, "the best alternative" given what it said was the "considerable" risk that value would erode further without an offer. Indeed, given the bidders' holding and the absence of rival suitors, analysts had predicted a sharp drop in ENRC shares if the offer collapsed.
"In the light of the significant issues currently facing ENRC, and the prospects for ENRC and the impact on its value if the offer does not proceed, the board of Kazakhmys believes that the offer represents the only realistic opportunity to realize value for the group's investment in ENRC," Kazakhmys's chairman, Simon Heale, said.
Seeking to woo its own shareholders, Kazakhmys outlined reasons for supporting the offer, including $887 million in cash and 77 million shares that will boost its finances at a time when it is developing mines. The shares will be cancelled.
The offer also ends Kazakhmys's association with troubled ENRC, increases the number of shares freely available to trade to over 50 percent and removes the Kazakh government as a shareholder.
Yet Kazakhmys's shares were down 8 percent at 247.7 pence, around their lowest levels since mid-2008. They were hit by the prospect of the government's shareholding being handed to ENRC shareholders - an effect not dissimilar to a share placing, given many will sell - and as traders fretted over the loss of earnings and an increased exposure to gold and silver at a time when precious metals prices are suffering.
Macquarie analyst Alon Olsha said the sale of ENRC would leave Kazakhmys looking expensive on an earnings multiple basis, though "that doesn't reflect the beneficial impact on the balance sheet".
"It does now put the focus squarely on Kazakhmys's core (business)," he said.
Societe Generale, Sberbank and VTB Capital are advising Eurasian Resources. ENRC's board is being advised by Lazard and Credit Suisse.
(Editing by Jane Baird and Mark Potter)