Allkem (ASX: AKE) and US-based Livent Corp is set to merge in an all-stock US$10.6 billion deal to create the world's third-largest lithium producer by 2027.
M&A activity in the ASX-listed lithium space is running hot this year, following Albemarle's attempt to take over Liontown Resources (ASX: LTR) and IGO's (ASX: IGO) bid for Essential Materials (ASX: ESS).
The new company (NewCo) will have a market cap of $10.6 billion before synergies. The key details include:
Allkem shareholders: Will receive one share in NewCo for each existing Allkem share
Livent shareholders: Will receive 2.406 shares in NewCo for each existing Livent share
Ownership: Allkem shareholders will own ~56% of NewCo, Livent ~44%
Market cap: The combined market cap of NewCo will be $10.6 billion before synergies
Listing: NewCo's primary listing is on the NYSE plus the ASX via Chess Depository Interests
Timing: The transaction is expected to close by the end of 2023, subject to shareholder, regulatory and Australian court approvals
To put it simply, the combined businesses will have one of the world's largest lithium reserves and production capabilities that sit behind only that of Albemarle and SQM.
From a production standpoint, the NewCo has exposure to all major products including spodumene, carbonate, hydroxide and other specialties via the integration of hardrock/brine resources to chemical processing.
From Allkem's perspective, the company operates three brine projects (Sal de Vida, Olaroz and Cauchari) and two hard rock projects (Mt Cattlin and James Bay). At present, it has limited chemical processing exposure via its 75% owned Naraha Plant in Japan producing its first lithium hydroxide in late October 2022.
The narrative is somewhat the opposite for Livent, with less upstream exposure but more chemical processing capabilities via lithium hydroxide plants in the US, China and Europe (some of which are still in development). To add some perspective, 51% of Livent revenues came from lithium hydroxide sales in 2022 but only 9% came from lithium carbonate.
The companies expect an estimated run-rate of approximately $125 million in annual cost synergies by 2027 via factors such as:
Argentina-based projects for both companies are located within 10 km of each other
Hard-rock projects in Quebec are within 100 km
Streamlining of corporate costs
Flexibility to utilise feedstock
Shared infrastructure
"We see compelling combination rationale in listing the pro forma NewCo in the US given Allkem's discounted valuation of 5.8x/3.4x 23/24e EBITDA in addition to enhanced operational scale, aforementioned cost synergies, a perhaps more capital efficient profile in Canada/Argentina and a more de-risked funding profile," TD Securities said in a note on Wednesday.
"Livent currently trades at almost double the 2024e EBITDAX of AKE."
The numbers for what shareholders will receive is a little interesting. To recap:
Allkem shareholders will receive 1 NewCo share
Livent shareholders will receive 2.406 NewCo shares
Allkem opened at $14.55 on Thursday and Livent shares closed at US$25.50 (A$37.60). For simplicity, we will convert all figures to AUD.
Based on Allkem's open, NewCo's fair value is $14.55.
But Livent shareholders are effectively paying $15.63 (A$37.60 dividend by 2.406) or approximately 7% more.
For a Livent shareholder that wants exposure to NewCo, aren't you better off holding Allkem?
It's a sea of green for ASX lithium stocks on Thursday.
Ticker | Company | Price | % Chg | Mkt Cap | 1 Year |
---|---|---|---|---|---|
Pilbara Minerals | $4.80 | 5.50% | $14.39bn | 83.21% | |
Allkem | $14.59 | 13.01% | $9.3bn | 29.69% | |
Liontown Resources | $2.94 | 1.56% | $6.46bn | 135.74% | |
Core Lithium | $1.05 | 3.19% | $1.96bn | -8.08% | |
Sayona Mining | $0.21 | 2.50% | $1.87bn | -18.00% | |
Lake Resources | $0.53 | 3.92% | $753.9m | -63.57% | |
Argosy Minerals | $0.54 | 3.88% | $751.36m | 38.96% | |
Global Lithium Resources | $1.58 | 2.60% | $409.28m | -3.36% |
A little over two years ago, Orocobre and Galaxy Resources merged to create Allkem.
In a sense, we lost two companies with distinct characteristics (Orocobre for South American brine and Galaxy for Australia/Canada hardrock) for a more diversified play.
More recently, we have Albemarle trying to take out Liontown.
It’s a little sad to say that M&A is really reducing the breadth of names we have in the large cap end of town.
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