Analysis: As Aussie magnates gatecrash lithium deals, bankers get creative

Leo Lithium

15/11/2023 05:40

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      Two-pronged approach likely to become more frequent 
    

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      Australian companies have home advantage
    

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      Australia lithium still a hot investment sector
    

  
    By Melanie Burton
       MELBOURNE, Nov 15 (Reuters) - Australian mining moguls
who have gatecrashed the country's recent international lithium
deals have pushed bankers into trying fresh measures to fend off
interlopers unwilling to pay the full price for their target.
    Australia's vast lithium deposits needed for batteries for
electric vehicles and the energy transition are drawing interest
from global chemicals makers but local mining moguls Gina
Rinehart, the country's richest person, and Chris Ellison have
already thwarted two deals and threaten another. 
    While Rinehart's Hancock Prospecting and Ellison's Mineral
Resources  MIN.AX  have refrained from full takeovers of the
companies in the local lithium sector, their tactical efforts to
keep foreign companies from doing so gives them time to
establish a stronger footprint in the emerging industry.
        Hancock disrupted a proposed $4.3 billion deal between
Australia's Liontown Resources  LTR.AX  and top lithium maker
Albemarle  ALB.N  after it bought a 19.9% stake in the lithium
developer, enough to block Albemarle's bid under Australian law.
    Hancock and Mineral Resources are threatening the same with
the deal between Azure Minerals  and Chile's SQM
 SQMA.SN , the world's second-biggest lithium chemicals maker,
after the companies accumulated shares of 18.9% and 13.6%,
respectively.
    In taking the stakes, Hancock has underscored its expertise
in building mining projects, while Mineral Resources has said it
wants to be part of projects that will sustain its growth for
decades. Neither company has made an outright bid for Azure or
Liontown.
    Hancock and Mineral Resources declined to make additional
comments. 
    Building these stakes offers influence over lithium
developers for less money than a full takeover, and an option to
take a bigger part in the growing industry, which will include
downstream processing, said Marc Upcroft, a partner at PwC in
Australia.
    "If you have a blocking stake, that means that no one else
is going to be able to easily come in and take control of the
project. Then you've effectively, for a smaller price, built
your role to play with that project going forward," he said.
    Falling lithium prices over the past year, leading to lower
stock prices for the developers, have propelled the interest in
the acquisitions, along with the outlook for surging demand for
the metal. 
    As well as Liontown, Core Lithium  CXO.AX , Leo Lithium
 LLL.AX  Latin Resources  LRS.AX  Patriot Metals  PMT.AX ,
Chalice  CHN.AX , Centaurus  CTM.AX  and Rex Minerals  RXM.AX 
have all been cited by brokers as buyout prospects.
    
    TWO-PRONGED SOLUTION
    Their deep pockets, risk appetite and Australia's
competition laws means mining magnates have a home advantage
against listed companies, industry sources say.
    "M&A in Australia is a rough game and home players have a
big advantage especially when it's private money," said a
financier at a global bank active in the lithium space, who
asked to remain unidentified because of company policy.   
    One example that bankers offered in the case of SQM's bid
for Azure was a two-pronged solution to erode any interloper
advantage.   
    SQM's $900 million offer for Azure was set up as a so-called
scheme of arrangement which must be court-approved and where 75%
of voting shareholders must also back the plan. 
    The offer also included an off-market takeover option where
SQM could go directly to shareholders if the scheme of
arrangement should fail because an interloper accumulated 19% of
the stock.  
    This dual-pronged approach has only been done in Australia
six times, said Richard Lustig, head of Australian M&A at law
firm Baker McKenzie in Melbourne.      
    "It started as a curiosity, now it's getting some kind of
traction," he said. 
    The dual offer is useful for firms that are open to holding
less than a 100% stake.
    It offers a route for shareholders to accept a direct offer
if an interloper appears, which can be faster than waiting
months for the scheme of arrangement to complete.
    It becomes harder for an interloper to build a blocking
stake, and they are faced with the prospect that a bidder can
take control even if they block the scheme, potentially leaving
them as a minority shareholder and eroding their influence over
the target firm.  
    "If there is a concern a scheme may get blocked by an
existing shareholder or an interloper who has no intention of
making an offer for the whole company then yes, this structure
will be used more often," said a second banker involved in
global lithium acquisitions. 

 (Reporting by Melanie Burton; Editing by Christian
Schmollinger)
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