ENRC/KAZ takeover likely impact

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Update – I guess turkey’s do vote for Xmas.

We open this blog with the following from the last statement by ENRC’s Chairman – 

“This request to the Panel was made by the Independent Committee with the expectation that any revised proposal will have regard to the Independent Committee’s strong view that the initial proposal materially undervalued ENRC.

If the press stories are right in that the bid is in fact unrevised, then this puts everyone in an unprecedented situation… What the entire crew desperately need to do is get the KAZ valuation back upto some semblance of realism from the crazy current level of just over 2 times EV:EBITDA and under 3 times price to cash for this prospective year.

Quite where Vladimir Kim the KAZ Chairman is in all this is beyond us too, as he has pledged 91m of his KAZ stock as collateral against loans with a price at the time of around 800p.

As for Suleiman Kerimov and the loss of reputation on his part here if he accepts the bid, there is only one thing for it and that is for him to bid Kakazhmys for its ENRC stake and so effectively block the bid on the current terms. If he paid 300p per share for KAZ’s stake, he just might get the stock and so really force the 3 highway bandits hands. Don’t rule such a maneouvre out. 

Vladimir Kim, KAZ Chairman

A condition of the offer is that KAZ’s board gives approval to the offer. However, KAZ will need to put it to their shareholders. Given that Vladimir Kim and the Kazakh Govt control just over 50% of the stock, in reality this means that Kim is the swing man here. We doubt Kim would give his vote unless he felt it was going to be positive for KAZ otherwise that would be like a turkey voting for Xmas! Particularly given the stock pledge detailed above.

Let’s take a re-look based on the current terms on the potential impacts on KAZ & ENRC’s stock prices tomorrow – 

KAZ will receive just under £600m in cash and be handed back 77m of their own shares. Assuming the stock price went nowhere, then the Enterprise Value would be as follows – 

446m shares in issue x 2.70 = £1.2bn – £100m net cash (current debt is £455m) = £1.1bn.

Excluding ENRC’s contribution to its bottom line, the company produced just under £900m of EBITDA at the last set of results and so it is trading, at the current price on the proposed bid terms, at a little over 1 times historic EBITDA. That’s right – ONE  TIMES. A buyer at this level gets their cash back in 1 year on this measure.

It’s Ekibastuz power division is slated to produce around £150m of EBITDA for 2013 and peer group multiples are around 6 times. This puts a value of around £900m on this prize asset – news is still awaited on the proposed sale of KAZ’s remaining 50% to Samruk-Kazyna for a mooted price around this level. Indeed, it is interesting to note in the results in Feb that the CEO stated the following re Ekibastuz –“…the Board believes that the value of this asset, which is the largest power station in Kazakhstan, is inadequately reflected in our share price.” This was at a then price of approaching 800p per share!! We’d expect potential news on the sale of this shortly as over 4 months have elapsed since the RNS in Feb confirming its early stage sale process (see below) – 

Kazakhmys PLC (the “Group” or “Kazakhmys”) notes media speculation relating to the Group’s 50% holding in Ekibastuz GRES-1, the largest power station in Kazakhstan. 

Kazakhmys has entered into discussions regarding the holding, but these are at an early stage and may or may not lead to a transaction. 

A further announcement will be made, if appropriate, in due course.

As for KAZ’s copper assets – analyst estimates centre around £500m (at current FX rates) of EBITDA for 2013. Whichever way you look at it, the stock price does not reflect any value either for its world class copper operations or Ekibastuz. 

Our guess is a sharp rebound in KAZ tomorrow towards the 300p level as the market sees clarity over the component pieces of the Group and the massive discount that has now gone beyond ridiculous. In adjusting the balance sheet for another circa £500m write down on the ENRC holding, then the net tangible book value will be around £3.5bn & so meaning that KAZ currently trades at 0.3 times NBV – effectively the same as at the 2009 nadirs.

With regards ENRC’s likely stock price movement tomorrow, assuming the RNS is confirmed first thing and there is the support of KAZ’s board, then expect the stock price to move towards the 230p level. Gyrations will be dictated then by movements in KAZ’s stock price.

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