Lithium miners unearth shovel-ready $11 bln deal

Allkem

11/05/2023 05:54

(The author is a Reuters Breakingviews columnist.  The opinions
expressed are his own.)
    By George Hay
       LONDON, May 10 (Reuters Breakingviews) - Allkem  AKE.AX 
and Livent  LTHM.N  may have unearthed that rare commodity: a
merger of equals that works. The Australian lithium miner and
its U.S. chemical processing peer said on Wednesday they were
uniting in a $10.6 billion all-share deal. While it contains
some of the usual horse-trading typical of the structure,
there’s plenty of strategic and financial logic to satisfy
shareholders.
    Lithium is a volatile sector. As of last November, Chinese
prices of lithium carbonate used in electric-vehicle batteries
had risen tenfold in only two years, driven by the potential for
demand to jump fivefold by 2030. But then they crashed by nearly
75% as Beijing withdrew EV subsidies. Given the risk the prime
metal for batteries could feasibly be something other than
lithium, it’s easy to see prices yoyoing for a while. Meantime,
supply chains have been getting riskier and Chile recently
nationalised its domestic lithium sector. 
    Against that backdrop, the combination of $5.6 billion
Allkem and $5 billion Livent makes sense. By 2027, their
forecast of 250,000 tonnes of annual lithium output should make
it the third-biggest producer worldwide, after $23 billion
Albemarle  ALB.N  and $18 billion SQM  SQMA.SN . Both have
Chilean exposure, however.
    Vertical integration means Livent accesses a secure supply
of newly mined lithium, while Allkem’s processing capabilities
should translate into an implied trading multiple higher than
its current 5 times EBITDA for the year ending June 2024. A
diversified, U.S.-listed lithium company also should attract big
customers such as Volkswagen  VOWG_p.DE  and fund managers
seeking a safer way to invest in the metal.
    Livent’s owners are handing over some value. Based solely on
Tuesday’s closing prices, they should have 48% of the company,
rather than the 44% envisioned under the deal terms. The 14%
premium Allkem shareholders are receiving relative to the last
month’s volume-weighted average price reflects the net asset
value Livent boss Paul Graves assigns to his new partner, but
also might be because he’ll be running the combined company. 
    Judging by Wednesday’s 5% jump to Livent’s stock price, its
shareholders aren’t too worried. Taxed and capitalised, the
promised $125 million of annual synergies from splicing
overlapping areas such as Argentina are worth around $900
million today. Despite ceding some of those benefits, they
should gain from a rethink of Allkem’s valuation. And if the
lithium price slumps further, neither side has locked in a toppy
valuation by paying cash. All told, the transaction looks
shovel-ready.
    Follow @gfhay on Twitter
    
    CONTEXT NEWS
    Australian lithium miner Allkem said on May 10 it would
merge with U.S.-based Livent in an all-stock deal to create a
$10.6 billion company producing key raw materials used in
electric-vehicle batteries.
    The combined company would be the fifth-largest lithium
producer in the world after Albemarle, Sociedad Quimica y Minera
de Chile, Ganfeng Lithium and Tianqi Lithium.
    Under the terms of the transaction, Allkem shareholders will
get one share in the combined entity for each of their existing
shares and own 56% of the new company. Livent shareholders will
get 2.406 shares in the new company for each of their existing
shares.
    Livent CEO Paul Graves and Allkem Chairman Peter Coleman
will serve in the same respective roles at the combined company,
which will be primarily listed on the New York Stock Exchange
and seek inclusion on Australia’s benchmark S&P/ASX 200 index.
    Following the announcement, Livent shares increased 3.4% to
$25 in early trading on May 10. The Australian stock market was
closed.

 (Editing by Jeffrey Goldfarb and Oliver Taslic)
 ((For previous columns by the author, Reuters customers can
click on  HAY/ 
SIGN UP FOR BREAKINGVIEWS EMAIL ALERTS https://bit.ly/BVsubscribe
 | george.hay@thomsonreuters.com; Reuters Messaging:
george.hay.thomsonreuters.com@reuters.net))