Kazakhstan’s state-owned oil and gas company KazMunayGas has offered to buy out minority shareholders at its London-listed upstream arm KazMunaiGas Exploration Production (KMG EP) as it seeks stronger control over the well-heeled subsidiary.

The move comes as no surprise as recent reports suggested the debt-ridden KazMunayGas is eying the huge cash pile of KMG EP, in which it holds a 63% stake. That is despite the fact that KazMunayGas’ parent, Samruk-Kazyna sovereign wealth fund, have repeatedly denied any buy-back plans. Kazakhstan’s desire to maintain significant control over the company threatens to come into conflict with its ambitious privatisation programme.

KazMunayGas (NC KMG) offered to buy out minorities at a price $47.28 per common share, or $7.88 per global depository receipt (GDR). The offer represented a 12.6% premium to closing price of $7.00 on June 16.

NC KMG made the offer as part of a broader proposal to amend KMG EP's charter and an agreement governing the relationship between the two companies. The share purchase offer is conditional on the approval of those amendments, to be voted at an extraordinary shareholders meeting scheduled for August 3. NC KMG “believes that these changes are crucial to reduce bureaucracy and duplication, optimise cost and improve focus and decision-making, thereby promoting a turnaround in the operational performance of KMG EP,” it said in a circular. The Kazakh state-owned firm said it does not want to significantly increase its stake in KMG EP and is committed to maintaining its stock exchange listing.

The proposed changes “would significantly weaken the protections afforded to independent shareholders”, the independent non-executive directors (INEDs) of KMG EP said in a separate statement adding that they would resign if changes are approved. The INEDs believe the proposed amendments “would stop KMG EP running its business independently of NC KMG and are not required in order to achieve underlying efficiency and performance improvements sought by KMG EP and NC KMG”.

“The INEDs also believe that the Purchase Offer made by NC KMG at a level that reflects the cash balances of KMG EP as at the end of Q1 2016 and an overdue receivable from a NC KMG group company, ascribing no value to the operational assets of KMG EP, significantly undervalues the company. Thus, the INEDs, having been so advised by HSBC and Rothschild, do not consider the Proposed Amendments and Purchase Offer to be fair or reasonable as far as Independent Shareholders of the Company are concerned and strongly recommend that all Independent Shareholders of the Company vote against the resolutions to be proposed at the EGM.”

Reports about disagreements between NC KMG and KMG EP over the huge cash pile the latter accumulated when the price of oil was high Reports resurfaced in late April; the national oil and gas company first announced plans to seek a loan to buy back minority shares in KMG EP but later denied the plans. Kazakhstan watchers suggest the move is driven by the national company’s need to service and pay its vast debts, standing at $10.7bn at the beginning of 2016. KMG EP is sitting on a cash pile totalling $3.1bn at the end of March.

This and other proxy fights in Kazakh London-listed companies are now threatening to undermine the government’s large-scale privatisation plans, especially those involving IPOs as there is no certainty as to how much control the government will exert over its strategic assets.

The Kazakh government’s privatisation plans involves the full or partial sell-off of 783 companies, including 217 in direct ownership of Samruk-Kazyna or via its national company subsidiaries. Out of 217 companies, 44 will be privatised via two-stage electronic competition, IPO/SPO and public-private partnership.

Samruk-Kazyna has for years tried to get rid of non-core assets, such as railway platforms, hotels or sport facilities owned by its subsidiaries, in order to boost competition in the wider economy. But it managed to sell only 38 assets out of planned 106 assets in 2013-2014, including two via “People’s IPO” programme – national power grid company KEGOC and oil-transporting KazTransOil, – the fund’s CEO, Umirzak Shukyev, told bne IntelliNews.