The Deal: ENRC Directors Slam Founders' Offer

NEW YORK ( The Deal) -- Eurasian Natural Resources Corp. (ENRC) warned minority shareholders they are being short-changed by a cash-and-share bid of about £3.1 billion ($4.8 billion) from the group's founders but said that investors may still have to accept the bid or risk being stranded in an unlisted and illiquid company.

Independent board members charged with assessing the bid for the London-listed mining company said Wednesday they could not recommend the offer of about 240.9 pence per share but admitted they were powerless to stop a bid that is backed by key shareholders with about 80% of the company.

"The independent committee believes that the offer materially undervalues ENRC and is, therefore, not capable of recommendation," the committee noted in a letter to shareholders. "However, given the risks and uncertainties ... the independent committee has concluded that relevant ENRC shareholders should seriously consider the offer."

ENRC is the world's largest producer of chrome, Kazakhstan's largest iron ore producer and the world's No. 9 producer of alumina. On Wednesday, it posted EBITDA of $944 million for the first half of 2013 from sales of $3.21 billion, down 17% and 1% respectively, year-on-year.

A consortium of Kazakhstan's State Property and Privatization Committee and three ENRC founders, Alexander Machkevitch, Alijan Ibragimov and Patokh Chodiev, are offering $2.65 in cash and 0.23 of a share in another mining company, Kazakhmys, for each ENRC share. The consortium, which made its offer on June 24, owns 53.9% of ENRC.

Shareholders in Kazakhmys, which is also listed on the London exchange and is the largest single investor in ENRC, with a 26% stake, voted on Aug. 2 to accept the offer. That support means that the consortium has secured 79.9% of ENRC, breaching a 75% mark that gives it effective control of the company. It also means it has enough shares to pursue its goal of cancelling ENRC's London listing.ENRC's independent committee said that the delisting was almost inevitable. It had "explored the possibility of generating viable alternatives to the offer," but found no other options and noted that the consortium would have the power to block any such proposal.

The takeover and subsequent delisting is likely to trigger early repayment of about $1.2 billion of ENRC's $5.4 billion of debt. That is expected to force the bidders into negotiations with lenders, though the would-be owners have said they will also consider selling assets to reduce the company's debts.

Cancelling ENRC's London listing will end a brief and troubled foray in the markets for the company. ENRC came to the market in December 2007, raising £1.36 billion selling shares at 540 pence each, equal to a total market capitalization of £6.8 billion. By mid-2008 its shares had almost tripled to 1,500 pence before tumbling to 201 pence in November as it cut output and deferred spending in the wake of the global economic downturn.

More recently the company has been hit by corporate governance woes, which resulted in the ousting of senior board members in 2011, and in April it became the subject of an investigation from the Serious Fraud Office, following a long-running informal inquiry by the agency into "allegations of fraud, bribery and corruption."

ENRC in April fired law firm Dechert, which had been running its internal investigation into the company's conduct. Dechert later wrote to ENRC to say it had found "documentary evidence regarding the making of cash payments to African presidents" and evidence that $35 million had been misappropriated from the company. ENRC denies the claims.

The company is also in the process of suing former director Sir Paul Judge, alleging that he disclosed confidential information to the media that has "damaged the company, its reputation and ultimately shareholder value."

ENRC's independent directors are taking advice from Credit Suisse ( CS) and Lazard ( LAZ). Shares in ENRC traded Wednesday at 230.3 pence, down 6.2 pence, or 2.62%, on their Tuesday close.

Written by Paul Whitfield.

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