As investors grow increasingly selective about individual Russian companies, some are finding the overall attractions of Kazakhstan more compelling. The recent initial public offering (IPO) of KazMunaiGas Exploration Production (KMGEP) heralds more of the same from the central Asian republic, while adding a certain polish to Credit Suisse’s reputation for emerging markets flotations.
In late September, state oil conglomerate KazMunaiGas (KMG) sold 40% of its shares in KMGEP, an upstream subsidiary, in an offering split equally between the Almaty and London stock exchanges. KMGEP is the third Kazakh company to list on London’s main market, after last year’s offerings by copper producer Kazakhmys and Kazakhgold (however, the latter two are registered as UK and Dutch companies, respectively). But it raised considerably more money than either of its predecessors and is the only Kazakh-registered company of the three.
Kazakhstan is not a democratic paradise but investors like its story of natural resource wealth accompanied by economic reform. They also like the fact that the presidential regime is stable and friendly to foreign investors.
Building trust
Investor sentiment may be warming up but shareholders still need to know that the business they are buying is not corrupt and will look after their interests. Convincing them that KMGEP’s transparency and corporate governance were up to scratch was the principal challenge facing the IPO’s joint global co-ordinators and bookrunners, Credit Suisse and ABN AMRO.
ABN AMRO has had an office in Kazakhstan since the 1990s and was the local anchor for the deal’s preparation. Credit Suisse, which plans to open its own office soon, is not a stranger either, acting as joint bookrunner in the earlier Kazakhmys transaction. Its role in the KMGEP deal was “to drive the execution”, according to Igor Ukrasin, director, European energy investment banking group, who led the Credit Suisse team.
The mandate was awarded in March 2005, with Almaty-based Visor Capital appointed as domestic lead manager. The original hope was that an IPO could be launched in the autumn of the same year. But there was much work to be done.
“This was the first international IPO of a domiciled Kazakh company,” points out Ben Canning of Credit Suisse’s global markets solutions group, who was responsible for day-to-day project co-ordination. “We spent a lot of time making sure that the parallel offerings were in line with international practice.” Together with “aiding regulation change”, it took 18 months.
Legislative changes
The project involved changes in Kazakh law, which previously did not permit bookbuilding nor allow holders of global depository receipts (GDRs) to vote their shares. The relationship between the company, its parent and the state also had to be addressed. Article 71 of the Subsoil Law gives the state pre-emptive rights over any transaction involving Kazakh oil, gas and other important mineral assets.
Although it has yet to use its rights formally, the government has simply pointed to them in order to steer some important oil and gas interests into the arms of KMG. These interests include part of BG’s former stake in the large Kashagan field, a 33% stake in Toronto-listed PetroKazakhstan and 50% of upstream operator KazGerMunai. It intends to sell the latter two to KMGEP.
“For the IPO to succeed, it was important that the parent company promised to use its best efforts to use Article 71 on behalf of KMGEP,” says Mr Ukrasin. A services agreement between KMG and KMGEP ensures that it will. It also enshrines KMG’s promise not to create another separate exploration and production subsidiary and a relationship agreement sets limits on KMG’s power as the majority shareholder.
Some concerns were expressed over KMGEP’s assets: maturing, onshore fields as opposed to some of Kazakhstan’s more promising newer discoveries. KMG contributed only those assets that it owned 100%, and not its outside joint ventures. The bankers argue that the pricing takes this fully into account. “Valuation would normally include the core valuation of the fields plus some upside,” says Mr Ukrasin. “The issue price was within the range of core valuation, excluding any upside.”
The acquisition of the PetroKazakhstan and KazGerMunai stakes will rejuvenate the portfolio, says Mr Ukrasin. To combat worries over the price that KMG might extract for these stakes, minority shareholders will be allowed to vote on the acquisitions.
In case investors had any lingering doubts, the company then appointed three heavyweight non-executive directors: well-known fund manager Paul Manduca, a former CEO of Deutsche Asset Management and Rothschild Asset Management; mergers and acquisitions specialist Christopher Mackenzie, formerly of JPMorgan and GE Capital; and Eddie Walsh, who was a senior E&P executive with BP and British Gas. “How many state-owned companies in the former Soviet Union are prepared to have three independent directors on a board of eight?” asks Mr Ukrasin. “For a GDR issue, this is a market-leading standard.”
Two-part offering
Once the company was ready for market, two issues of equal size were planned: a GDR offering in London and a share issue on the Kazakhstan stock exchange. “One of the objectives was to help develop the local stock market,” notes Nick Koemtzopoulos, a director in ECM origination at Credit Suisse.
One of the notable features of the Kazakh financial landscape is its private-sector pension funds industry. It has plenty of money to invest but is obliged to invest it in Kazakh stocks – and there are not very many of them.
In the primary markets, it usually pays to expect the unexpected – as the advisers swung into their pre-marketing investor education phase, there came the least welcome of all possible developments. The price of oil, so high for so long, began to fall. Between then and completion, the price, which was in the high $70s, plunged by $20, half of that while the deal was in the market. The price of the all-important comparable stocks, reference points for the valuation, fell with it. Russia’s Lukoil lost 13% in the period.
“The oil price fell below our own three-year forecast of $63,” remembers Stephane Gruffat, director, equity syndicate at Credit Suisse, and closely involved with the deal’s pricing and distribution. “And we calculated that each $1 fall equated to $130m of equity value.”
One way to buy
For an emerging markets fund that likes resource stocks, there was only one way to buy Kazakhstan and this was it. “Many of these funds are weighted towards Russia,” Mr Gruffat says. “This allowed them to diversify the portfolio, giving them exposure to a new market, with country risk superior to Russia’s.”
And that was how investors saw it. The stock was finally priced at $14.64, at the high end of the $12.78 to $14.75 marketing range, raising about $2bn before the exercise of the over-allocation option. That was getting on for twice the amount raised by Kazakhmys, making it the second largest offering ever out of emerging Europe, after Rosneft. The local tranche was a roaring success. The decision was taken to distribute as much as possible to the pension funds and, as far as they were concerned, this was manna from heaven – the bluest of blue chips.
“We could easily have done just another GDR listing, but the government and the parent didn’t want that,” says Mr Ukrasin. “This company is head and shoulders above the standard GDR, in terms of implementing reporting and control mechanisms, reserves and environmental studies.”
It has also paved the way for what is likely to be an accelerated wave of other new Kazakh listings. Mr Ukrasin insists: “This has opened up Kazakhstan for equity investors, which means it has achieved a goal for them as well as for the company.”
