Minority shareholders of KazMunaiGas Exploration Production (KMG EP) rejected at an extraordinary general meeting (EGM) on August 3 proposals from the company’s parent, Kazakh national oil and gas company KazMunayGas (NC KMG), to make amendments to the relationship agreement between the two companies, which involved a share buyback that would bring the well-heeled upstream arm under greater control of the cash-strapped parent.
The ongoing conflict between the state-owned parent and its private sector upstream arm threatens to derail plans by Kazakhstan to carry out a massive privatisation programme, which it hopes will attract major foreign investment through floating stakes of up to 25% in seven flagship companies.
NC KMG called an EGM on June 17 in order to offer to buy back minority stakes in its London-listed upstream KMG EP for $47.28 per common share, or $7.88 per global depository receipt (GDR), which was a 12.6% premium to the closing price of $7 per share on June 16. But after independent non-executive directors of KMG EP criticised the offer and urged minority stakeholders to reject it, in mid-July the national company improved its offer by increasing the buyback price to $9.00 per GDR, which represented a 12.4% premium to the closing price of $8.01 on July 13. The price of GDRs closed at $7.2 on the London Stock Exchange on August 3, down from $7.66 at the opening.
NC KMG justified its proposed move by saying it “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”.
But independent non-executive directors of KMG EP responded that the proposed changes to the relationship agreement “would significantly weaken the protections afforded to independent shareholders” and argued that 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”.
Kazakhstan watchers say the move by the state company was driven by its need to service and pay down its vast debts, standing at $10.7bn at the beginning of 2016. KMG EP is sitting on a cash pile of more than $3bn. NC KMG has repeatedly denied it is seeking to buy back all minority stakes, insisting it does not want to significantly increase its 63% stake in KMG EP.
KMG EP said following the conclusion of the EGM: “The Independent Shareholders voted ‘Against’ Resolutions 1 and 2 regarding the introduction of changes and amendments to the Relationship Agreement and Charter of the Company”.
Resolution 1 sought endorsement by minority stakeholders of the changes and amendments to the relationship agreement between NC KMG and KMG EP dated 8 September 2006 and Resolution 2 sought endorsement by the independent shareholders of changes and amendments to the charter of KMG EP.
Since the resolutions on the changes to the relationship agreement and to KMG EP’s charter were not endorsed, the purchase offer did not enter into force and the proposed changes and amendments to the relationship agreement and the charter will not proceed, KMG EP explained.
Kazakhstan’s state-run Single Accumulative Pension Fund, which owns about 2.8% of KMG EP’s ordinary shares, did not comply with the requirements of Kazakh legislation on disclosure of beneficial owners of GDRs, and, therefore, was unable to cast its GDR votes at the EGM. However, a representative of the fund indicated at the EGM that had it complied with all legal requirements, the fund would have cast its GDR votes in favour of Resolutions 1 and 2 proposed at the EGM.
The fund’s votes excluded, 24.3% of GDR votes were cast in favour of Resolutions 1 and 2, while 75.7% of votes were cast against.
Kazakhstan has announced plans to carry out a massive privatisation programme that aims to attract foreign investment through floating stakes of up to 25% in seven flagship companies: NC KMG, Kazatomprom uranium producer, Kazakhstan Temir Zholy railway operator, Kazpost, Air Astana, Samruk-Energy electricity producer and Tau-Ken Samruk mining holding company.
However, the conflict between NC KMG, fully-owned by the state via the Samruk-Kazyna sovereign wealth fund, and KMG EP threatens to derail these plans unless the government abandons its appetite for interfering in privatised companies and learns to honour commitments it makes to investors.