It’s official. The UK government’s Serious Fraud Office will formally investigate ENRC. The SFO said the focus of the investigation would be “fraud, bribery, and corruption relating to the acitivities of the company or its subsidaries in Kazakhstan and Africa.” According to the Guardian, Dechert, the law firm hired by ENRC to investigate allegations, said its efforts were hampered by staff forging documents, supplying “the wrong computer to the investigation team” and setting up a “false office.” The company said it would assist and cooperate with the agency. ENRC didn’t get any love from Macquarie Equities Research last week. The investment company downgraded the company’s stock by two notches to underperform from outperform. Investors who are betting that the principal owners will price their IPO aggressively will be disappointed according to Macquarie.

 

Almost as soon as the potential privatization was announced, ENRC’s share price went up about 30% in anticipation of a high-priced offer. However, it is unlikely that anyone other than the current controlling owners will submit a counteroffer. In addition, those consortium members thinking about taking ENRC private already have a combined interest of 82% in the company, more than enough to cover the 75% level required by the LSE to take over the company. However, to delist the company, which it wants to do, the consortium would need to add Kazakhmys’ shares plus 7-8% of the minority shareholders to reach the 90% squeeze out level.

 

This would leave the minority shareholders out in the cold with meaningless shares.

 

Macquarie feels that the stock is now fairly priced and there is no need to offer more. However, the possibility that the principal owners won’t pursue the privatization would strand the independent shareholders.

“Risk-adjusted return analysis suggests ENRC is now fairly valued: Applying an even probability to three scenarios (30% bid premium, 50% bid premium, no deal) implies a share price of only ￡2.82 per share and suggests no upside from current levels,” the investment bank wrote.

 

“Although we believe ENRC remains fundamentally undervalued, near-term deal dynamics create an unfavorable risk-return profile for the stock. Indeed, we think the conditions for a share price collapse have now been established, leaving investors exposed in the event a deal fails to materialize.”