China’s CEFC will not buy a majority stake in Kazmunaigas International (KMGI), owned by Kazakhstan’s state-owned oil and gas firm Kazmunaigas, a disappointing development for a deal more than two years in the making.
CEFC and Kazmunaigas had first agreed to sell a 51 percent stake in its Romanian assets, owned by one of its subsidiaries, KMGI (formerly known as Rompetrol), in December 2015. The deal would have bypassed a prospective IPO that the Kazakh government was preparing for some of its state-owned assets. However, the agreement had been repeatedly delayed in the past months due to legal spats involving, separately, CEFC and KMGI.
The deal, worth around $700 million, according to sources close to the negotiations, was canceled on July 3.
“There will be no deal,” a senior Kazakh official told Reuters.
Chinese sources said that the deal had fallen through because CEFC failed to pay a $50 million deposit to kickstart negotiations by the end of June.
A large private oil and gas conglomerate, CEFC has gone through a troublesome year, as its Chairman Ye Jianming was investigated and left his post in February, one of its branches (CEFC Shanghai International Group) failed to pay back 2 billion yuan ($313 million) of bonds in May, and a $9 billion deal to buy a stake in Russia’s oil giant Rosneft fell through. The company, once mostly focused on acquisitions in the former Soviet Union, has piled up a huge volume of debt, amounting to around $7 billion. In May, it was reported that its staff had not received a salary for two months. Weeks earlier, CEFC management had said that the company could have slashed its 30,000-employee roster in half.
Trouble at CEFC could be named the ultimate obstacle for the deal with Kazmunaigas, which was also looking for cash as it sought to offload KMGI. Netherlands-registered KMGI owns hundreds of petrol stations in Romania, Bulgaria, and Moldova and the Petromidia refinery, the Romania’s largest, and the Vega refinery.
Kazmunaigas bought a 75 percent stake in Rompetrol in 2007 for around $1.6 billion. It completed the acquisition in 2009, when it bought the remaining 25 percent from the previous owners of Rompetrol, Romanian businessman Dinu Patriciu and American businessman Philip Stephenson. The previous owners had set up the controlling company in the Netherlands in 2000, though most of the business was to be conducted in Romania; the headquarters of Rompetrol, now KMGI, remained in the Netherlands after the deal.
The Romanian government had grown increasingly dissatisfied in recent years with KMGI regarding the company’s investment plans and asset conversion. In mid-2016, it launched an investigation into KMGI’s refinery, with the intent to recover funds that the previous owners had allegedly failed to transfer. In 2003, Rompetrol bought the Petromidia refinery from the state for $760 million, but the deal was closed with a bond, rather than cash. In 2010, when Rompetrol’s bonds reached maturity, Kazmunaigas refused to pay the government the $600 million coupon, transferring instead a 45 percent stake in the refinery to the government. In 2014, KMGI and the government had agreed to transfer an additional 27 percent stake to KMGI for $200 million, but the company did not finalize the deal.*
With pending litigation, during which Romanian authorities had temporarily seized the refinery, KMGI has had trouble in selling off its assets. CEFC could be substituted by another investor, according to sources close to the deal. But still, Kazmunaigas, its parent company, seems in desperate need for cash, as shown in a recent bond restructuring. Part of the company could be sold off to Shell in an attempt to make its assets even more appealing to international investors ahead of a potential IPO. With the CEFC-KMGI deal out of the window after a 30-month negotiation, Kazmunaigas will have to hurry to find other ways to produce cash to cover its debts and expenses.
*Correction: A previous version of the article incorrectly implied that the 2014 deal was finalized, it was not.