ENRC & KAZ initial thoughts… UPDATE

Suleiman Kerimov

UPDATE – 8:30AM MONDAY – So, the terms are confirmed this morning. The plot thickens however in that Kazakhmys are deemed to be a “Party to the Offer”.

If the Scheme of Arrangement structure is still intended to be used then, re the comment “..for Panel purposes only Kazakhmys is treated as a Party to the Offer…”, we are unclear as to whether they will be able to vote their shares in ENRC too.

If that is the case, then it seems the bid doesn’t have a hope in hell in getting through at the current level as the balance minorities have made their feelings clear on the price. Don’t rule out a squeeze being put on KAZ’s stock to try and get the bid value up – this is probably the cheapest way to do it rather than raise the bid price! I also struggle to reason that the 3 oligarchs will want the stock price of ENRC to slump and they then be forced by he listing authorities to increase the free float (which they have to do) – it would be the reverse of the current situation in that instead of being cheap buyers at a cycle low, they would be cheap sellers…

It’s fair to say that the events of Friday caught us on the hop here. Rarely is “Mr Market” wrong and with the price hovering at 300p for the last few days of last week, the stage was seemingly set for a typical risk adjusted 10% discount to the bid conclusion and so an exit price of 340-350p. Even Suleiman Kerimov seems to have slipped on a banana skin with this one, buying a whopping 40 odd milion shares at a shade over 270p. You can bet he’s chewing over his options this weekend…

With conflicting news coming out of the various sources since Friday that claim to be close to the action, it’s difficult to assess what the real situation is, although the terms of 0.23 Kazakhmys shares (from the Kazakh Govt’s stake) and 175p in cash have come from a few.

Taking this as our starting point for valuation purposes, then in KAZ’s case, they have 26% of ENRC and so 335m shares. They would thus receive £586m in cash and reduce their own equity float through receiving back their own stock of around 77m shares. The net number of shares in existence would therefore fall by around 14%.

Kaz would then be in a net cash situation of around £150m (v debt of approx £450, currently) and, at the current price, have a market cap of £1.5bn so giving an EV of £1.35bn. Excluding ENRC’s earnings then its EV:EBITDA figure for 2013 based on broker consensus estimates will be approx £800m at current FX rates is 1.68 times. Nuff said on that.

The effect of the deal for KAZ would be, in essence, a cash injection and a simultaneous share buy-back although it’s fair to say that the fragmented shareholder base as a result of the new KAZ shareholders (approx 59m shares net of KAZ’s own stake) who may or may not want KAZ stock is a wild card…

There is also another major issue we see and that is if KAZ cancel the shares, which is what is likely to happen, CEO 7 major shareholder Vladimir Kim will automatically exceed the 29.99% holding level and so it would trigger an automatic bid requirement by him for KAZ according to the UK takeover rules!

What do you do if you are Suleiman Kerimov? Simple – you bid for KAZ to act as a blocking vote in the deal should KAZ decide to accept a stupidly low price from ENRC’s bidding consortia. Ekibastuz could be sold off and the copper division re-listed at a value likely 2-3 times the current embedded value. 

As for ENRC, at the price of 247p it equates to about 3.5 times price to cash – at a cyclical low point too. If the oligarch’s get away with it, it will be the deal of the year on their part!