Move on ENRC would be logical but tricky

-- The author is a Reuters Breakingviews columnist. The opinions expressed are his own --

By Quentin Webb
LONDON, June 13 (Reuters Breakingviews) - It's easy to see why an audacious acquirer like Glencore might want to snap up Eurasian Natural Resources Corporation. A deal between the recently floated commodity trader and the bad boy of the FTSE-100 would be inexpensive, make strategic sense and create an $80 billion-plus resources group. But the timing is bad for Glencore. Nor would buying the scandal-prone ENRC do anything to win over Glencore's sceptics.
Glencore boss Ivan Glasenberg always made it clear that the firm's flotation was about getting an acquisition currency. A weekend newspaper report that he is eyeing up ENRC is consistent with his ambitions. ENRC is a sitting duck. The departure of two independent directors had left the shares trading on 6.1 times forecast earnings, versus Glencore's 7.7 times, before the stock bounced on the suggestion of Glencore's interest.

There wouldn't be many rival bidders, either. The duo operates in Kazakhstan and the Democratic Republic of Congo, areas shunned by some bigger miners. Glencore would move into iron-ore production, and get more output in alumina, ferroalloys, and other metals. It could cut listing and head-office costs, and market ENRC's output through its world-leading trading operation. Paying a premium over ENRC's current $16 billion market value wouldn't be hard to justify.

But it's not an opportune moment to pounce. Glencore would want to pay in paper, yet it has pledged not to issue more shares before November. And investors would need some convincing that a deal this soon made sense, particularly since Glencore shares have drifted lower since listing. That gives ENRC time to address some of its governance problems, potentially reviving its shares.
A deal would also appear to up the risk profile of Glencore's asset base, with more exposure to DR Congo and Kazakhstan. And any transaction would need to negotiate the competing interests of ENRC's owners: copper producer Kazakhmys, with 26 percent; three oligarchs, with nearly 44 percent; the Kazakh state, with nearly 12 percent; and long-suffering independent shareholders. Kazakhstan might balk at having less control in a larger operation, while Glencore's minorities may feel uncomfortable that the big investor blocks in ENRC were joining the register, even if diluted, after recent events.
The business logic is there. But adopting ENRC would only heighten the contrast between Glencore and the mining establishment.

CONTEXT NEWS
-- Glencore is considering a 12 billion pound bid for Eurasia Natural Resources Corporation, the Kazakh mining company, the Sunday Times said on June 12. Quoting a source with knowledge of the discussions, the newspaper said Chief Executive Ivan Glasenberg had held talks in recent weeks with ENRC's founders and key shareholders Alexander Mashkevitch, Patokh Chodiev and Alijan Ibragimov.
-- ENRC shares rose more than 5 percent on Monday.
-- ENRC parted company with four of its non-executive directors on June 8. Richard Sykes, the former chief of GlaxoSmithKline, the pharma giant, and Ken Olisa, who also sits on the board of Thomson Reuters, failed to secure support in a shareholder vote. Two other directors, Abdraman Yedilbayev and Eduard Utepov, withdrew their names from the election at the last minute.
-- In an open letter published on June 8, Olisa wrote: "I explained my view that for companies such as ENRC, there are only two, mutually exclusive governance models -- either the founding shareholders should take a big step back and let the board of ENRC govern the company independently, or they should take a big step forward and play a hands on role in the strategic and operational detail of the business which they created".
-- Johannes Sittard, the ENRC chairman, said the group would undertake "a comprehensive review of its corporate governance". He said the process would take three months.

((quentin.webb@thomsonreuters.com))
(Editing by Chris Hughes and Sarah Bailey)