17.09.2010

Review of Mergers and Acquisitions of Subsoil Use Companies in 2009 and as of the Beginning of 2010

General information of trends in mergers and acquisitions in the Kazakh market

Current Kazakhstani practice shows that “acquisitions” are the most popular type of “mergers and acquisitions” transactions when the target company continues to exist and the deal only results in a change to its shareholding structure. Deals made in the form of a merger or consolidation in its direct meaning are quite rare, and usually parties to these transactions or their shareholders are related parties. This happens because Kazakhstan’s experience of market relations, including its history of mergers and acquisitions, started after its independence in 1991 and mostly companies tend to rely on Russian and Western experiences. Many terms that have not been properly adapted to the local legal framework or level of corporate law development, and some peculiarities of the political and social situation in the country, are nevertheless used in certain business situations in Kazakhstan.

It has been said that Kazakhstan is attractive for foreign investors. Although the global financial crunch has substantially slowed down the world merger and acquisition turnover, it did nevertheless not impede a number of large M&A deals involving Kazakh companies.

On the whole, when considering the Kazakhstani M&A market with a breakdown into industries, analysts say that the oil and gas sector is still the most receptive sector. The banking, mining and metallurgical industries were the other branches of the economy where large M&A deals were made in 2009 and 2010.

Mergers and acquisitions in the subsoil use sector in 2009 and 2010

2009 proved to be difficult for the majority of the world, including Kazakh subsoil-users, although it would be incorrect to view it as an unlucky year. The crisis did not only enable the market leaders to retain their position, but also to reinforce it through M&A deals by acquiring their less successful competitors.

The majority of M&A deals in Kazakhstan in 2009 were executed under the program aimed at the nationalisation of some large banks and the acquisition by the state of oil and gas companies. In addition to the above, mergers and acquisitions were substantially financed by the loans of Chinese and Korean companies.

The largest deal of 2009 in the oil and gas sector was an acquisition of the 100% interest in Kazakhstan’s third large oil company, Mangistaumunaigas, by Mangistau Investments B.V. which is owned by CNPC (50%) and the national company KazMunaiGas (50%). The amount of the transaction was 2,600,000,000 US Dollars. In addition, it is possible to place an emphasis on China Investment Corporation’s purchase of the 11% interest in KazMunaiGas Exploration and Production JSC for more than 900 US Dollars.

One of the significant events of 2009 in the Kazakh subsoil sector was the creation of the Tau-Ken Samruk National Mining Company. This national company was created to promote the state’s economic and strategic interests with regards to management of the public assets in the mining and metallurgical industry and the development of the country’s mineral and raw material complex. This proves that the state uses its resources to strengthen its requirements of subsoil users, as well as to tighten control over compliance with merger and acquisition procedures. The main purpose of Tau-Ken’s activity is as follows:

Ø to ensure efficient subsoil use operations related to the exploration, development, production, processing and sale of minerals;

Ø efficient management of the state’s interest in the mining and metallurgical companies;

Ø rehabilitation of the country’s minerals and raw materials, and the development of off-balance reserves of the fields.

We would like to remind you that, following the creation of Tau-Ken Samruk, a number of significant ministerial reforms took place in March 2010. The said reforms were also aimed at improving the state’s regulation of the subsoil user sector. As to the reforms, we should mention the separation of the oil and atomic industries, the coal industry and power engineering, which became apparent through the separation of the Oil and Gas Ministry from the Ministry of Energy and Mineral Resources. The power engineering, mining, atomic, and processing industries now fall within the competence of the Ministry of Energy and Mineral Resources, whereas the oil and gas industry are within the competence of the Oil and Gas Ministry. Consequently, KazMunaiGas has been released from its regulatory functions.

According to the information available to us, the following are the 10 largest M&A deals of 2009:

 

Transferee 

Target company

Industry

Interest, in %

Amount, in million US $

1.                

Mangistau Investments B.V.

(50% held by CNPC and

50% - by KazMunaiGas NC)

Mangistaumunaigas JSC

oil and gas;

production of raw hydrocarbons

100%

50.2%

$2600

2.                

China Investment Corp

KazMunaiGas  E&P JSC  

Exploration and production of oil products

11% GDR

$939

3.                

Samruk Kazyna Sovereign Wealth Fund

Electric power station GRES-1 ("Ekibastuz")

energy

50%

$681

4.                

Autoredmetzoloto" OJSC

Karatau LLP

Uranium production

50%

The two transactions were estimated together to be in the amount of approximately $560–580

5.                

 "Autoredmetzoloto " OJSC

Akbastau JV

Uranium production

25%

6.                

Kazakhmys Plc

Balkhash thermal power  plant

Fuel and energy  

10%

$450

(approximately)

7.                

Samruk-Energo JSC  

Bogatyr Access Komir LLP owning the Ekibastuz carbonous  deposit (Bogatyr and Severny open pits)

Coal production

50%

$345

8.                

Korea National Oil Corp (KNOC), South Korea  

Sumbe JSC holding the licences for the two oilfields

oil

85%

$335

9.                

Polyus Zoloto OJSC

 

KazakhGold

gold-mining

50.1%

$269

10.             

Polymetal OJSC

Varvarinskoye gold and copper deposit

Gold and copper

100%

$235

 The last year was also marked by the realisation of the “Caspian Energy HUB” international project. The agreement for the implementation of the “Caspian Energy HUB” project was signed in 2008 between Kazyna Sustained Development Fund, Kazakh State Holding Samruk, international consulting company PFC Energy, investment company Gulf Finance House specialising in projects related to innovations in the economy, and Mangistau Investment Company. According to the Mangistau Oblast Akim, Krymbek Kusherbayev, ”The multi-purpose service and technological centre for the oil and gas industry will allow us to extend the Caspian region’s capabilities and to realise its potential, as well to increase the level of human resources development and its economy on the whole.”

 By analysing the first six months of 2010, it is possible to single out the following significant M&A events:

1.   Settlement of the dispute between Lukoil Overseas Kumkol B.V., Russia, and China National Petroleum Corporation (CNPC), China, regarding a share in the Kazakhstani subsoil-user company, Turgai Petroleum. The dispute arose from a failure to grant Lukoil Overseas Kumkol B.V. a pre-emption right to purchase the share of CNPC. The dispute was settled by the Stockholm arbitration court in favour of Lukoil Overseas Kumkol B.V., although the latter waived its right to purchase the share of CNPC and instead received 438 million US Dollars in compensation (August 2010);

2.   Kazakhstan’s adoption of a new Subsoil Law, which sets forth a new governmental policy in respect of the oil and gas assets of the country.

Best Regards,

Corporate Law Department

Tel.: +7 (727) 2445-777
Fax: +7 (727) 2445-776
info@gratanet.com
corporate@gratanet.com