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ENRC had been considering making an approach to Kazakhmys below its share price for at least three weeks, dealReporter understands.
Last week Kazakhmys received an indicative and non-binding proposal in the form of a letter from ENRC, valuing each Kazakhmys share at around GBP 1550p. Kazakhmys shares closed Friday at GBP 1786 having fallen 6.69%.
Three weeks ago on 20 April Kazakhmys’s share price was GBP 1720p.
The offer, which included a dividend in specie representing Kazakhmys’s 14.6% holding in ENRC, is informal only and does not discharge the bidder’s obligations under the ”put up or shut up” notice. ENRC has until 16 May to make a firm commitment to Kazakhmys or walk away from the deal.
The two parties have not engaged in talks since an initial approach was confirmed in early March.
A source familiar with ENRC’s thinking said he thought it was now likely to walk away. It would look strange if the company was able to make an increased firm offer within a week, the source said. ENRC held a board meeting last week at which numerous possible M&A transactions and capital expenditure projects were discussed. A follow-up board meeting will be held in the first half of this week, said the source.
Several possible reasons for ENRC’s low bid have been suggested by sources familiar with the situation.
ENRC may have put in a weak bid for Kazakhmys under pressure last month from the government of Kazakhstan, according to one theory. ENRC’s bid may have been designed to “save face” following the confusion generated when it made its initial stock exchange announcement of 12 March when it said informal tie-up talks between itself and Kazakhmys had taken place. Shortly after the announcement Kazakhmys responded saying it had received no approach from ENRC.
A second source said Kazakhmys had called ENRC’s bluff with its response to the latter’s stock exchange announcement. ENRC may have made its low offer because it felt that Kazakhmys’s share price had run away from it. ENRC can now retreat gracefully and unwind its position, said the source. Alternatively, this will lower Kazakhmys’s share price as the market reacts to the low bid, and it may give ENRC time to look at the situation prior to the Panel deadline.
It is highly unlikely that ENRC would consider making a hostile bid for Kazakhmys, as the latter is more than 50% owned by chairman Vladimir Kim and CEO Oleg Novachuk, several sources said. Relations between Kim and ENRC’s hierarchy are understood by sources on both sides to be “frosty”. This could be partly because ENRC did not inform Kazakhmys prior to making its 12 March announcement.
It is understood that Kazakhmys’s board feels the company is substantially undervalued compared with its peers. Kim and CEO Novachuk, both in their forties, are involved in the day-to-day running of the company and are said to be keen to remain doing so. Any deal with ENRC would need to be structured to keep them deeply involved with the merged entity unless an ”astronomical” offer was made, it is understood. ”They both have a lot of business life left in them,” it was said.
Prior to ENRC’s IPO last December, Kazakhmys was considered to be the more likely acquiror in any deal involving the two Kazakh miners. However, a source familiar with ENRC said the miner grew rapidly after the IPO.
The influence of the Government of Kazakhstan on Kazakhmys and ENRC, in which it holds a significant stake, should not be underestimated, said the source familiar with ENRC. However, talk that the government is pressuring the two parties and controls the timing of such a transaction is questionable, it was said. It is a “commercially savvy” government and is unlikely to do anything to really damage the reputation of two FTSE 100 companies, said a source.
Last week market speculation suggested Kazakhmys could sell its 14.6% stake in ENRC after its lock-in period expires on 6 June. This was described as ”hot air” by the source familiar with ENRC’s thinking.
Both ENRC and Kazakhmys declined to comment.
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