According to Interfax, the Gazprom group aims to invest around RUB 60 bn in Kazanorgsintez within four years. The objective of the program is to scale up production at the company to RUB 120 bn, a nearly 5x surge y-o-y. In five years, Gazprom is expected to take over control of Kazanorgsintez by picking up its additional share issue or buying shares from its existing shareholders. In July, Kazanorgsintez will continue to process ethane on Sibur orders on the previous terms: 50% will be processed on purchase-sale terms and another 50% on tolling terms. Kazanorgsintez does not plan to hold an IPO any time soon.
In all likelihood, the parties have managed to strike a compromise in the ongoing conflict. In June 2007, Gazprom and Tatarstan established a working group, which will consider prospects for a long-term cooperation between Gazprom and the republic. The working group was established to find a solution to the conflict that erupted between Gazprom and Kazanorgsintez due to disagreements over terms for raw material supplies.
Sizeable investments on the part of Gazprom will undoubtedly benefit the Kazan Company, enabling it to expand production, which would have a beneficial effect on its financials in the long run. In addition, investments would help the company complete its wide-scale investment program, which has substantially increased the company's leverage to date. As a result, the company would face softer financial risks. However, to gain control over Kazanorgsintez, an additional share issue could be held, which might dilute minority shareholdings in the company. Moreover, should the placement price appear to be lower than the company's current market value, this could impair its stock valuations.
In the face of the high risks involved, we recommend that investors abstain from investments in Kazanorgsintez shares (RTS: KZOS, kzosp) in the near future.
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