ENRC CONUNDRUM & GAME THEORY

As we race down to the 2nd deadline of next Monday at 5PM for the 3 oligarchs to table a firm bid for ENRC (and there is unlikely to be a 3rd extension), we find ourselves in an intriguing game theory situation. 

Given that the independent Board of Directors rejected the last offer as “materially undervaluing” (their words not ours) ENRC (and this was at an equivalent price of 260p), with the price of KAZ continuing to plumb stupid depths, it is indeed an interesting conundrum that the oligarchs and the Board find themselves in… The market was wrong footed previously bidding ENRC stock up to nearly 320p in the days ahead of the deadline, and with metal prices under pressure again in recent days taking the shares lower, question is has the market now got it wrong in reverse this time?

We are in fact now in the somewhat peculiar situation of ENRC’s shares trading just less than where they were before the bid announcement and the bid already being rejected by the BoD as inadequate. Go figure that one…

We highly doubt, for all the reasons opined on this blog in recent weeks, that the 3 oligarchs want the company to remain in the public eye and the legal maneouvring in recent weeks to enable them to see the bid through points to some type of final offer being made. And so we come to one of 3 possible conclusions to this unique situation –

1. The oligarchs do not bid and, at face value, call the markets bluff. They only hurt themselves here however as the stock will likely fall back towards 200p AND, instead of getting the company on the cheap, they actually have to dilute themselves to meet the UK listing rules requirements. This dilution is the polar opposite of what they were/are trying to achieve. The other point is they would be restricted from bidding for a further 6 months at which point the commodities spectrum, in particular iron ore, may bounce back and so lift the ENRC valuation. Of course the SFO investigation is all aired in public too. I just don’t see this as a likely outcome but between this Kaz and AVM the market has thrown egg on my face this last 4 months so don’t discount it.

2. A final bid tabled on the same terms. Given that they cannot increase the KAZ shares component as this is a fixed sum (ie the Kazakhstan Govt hold a fixed number of KAZ shares), then the new bid is presently worth just 244p at the current KAZ price. Highly doubtful the independent BoD will sanction this and so we would be in the somewhat unusual situation of a Company’s Board actively pushing minorities to vote against the main shareholders. Net effect – more mess, likely further weakness on KAZ’s price, and so an even less value end bid.

3. A decent increase in the cash component (likely to 220-25p) that has the independent BoD acquiesce and, in all probability, keeps Suleiman Kerimov’s  peace (he has supposedly written to the Company’s Board pushing for 400p or thereabouts). Again, per (2), the KAZ component is fixed and so through raising the cash element from a real steal to just a steal, the net effect on KAZ’s stock price as the company would receive more cash for their stake in ENRC, will be to finally break the downtrend from over 800p and probably take the stock price back towards 400p  (which as you can see from below is what the wedge break pressages). At a 400p KAZ stock price and with 225p in cash the bid for ENRC would be worth approx 317p. 

What would you do in this game theory? I know what I’d do.

Here’s a final though as to what KAZ Chairman Vladimir Kim is likely to do (or what I would do in his shoes) re the stock that will be loose and in the hands of ex ENRC shareholders should the bid proceed – with approaching £700m in cash to fall into KAZ’s coffers at a cash component level of 220p, they’d be highly advised to use some of this to buy back their own stock further, particularly if the mooted Ekibastuz sale is well advanced and so their future copper plant investment profile is not compromised and balance sheet pressured.