The odds are stacked against Glencore’s all-share merger bid for Teck Resources, mainly because the family trust of the Canadian group’s former CEO and chair, Norman Keevil, is against it. The Keevil family have super-voting class A shares, which, despite comprising just 1% of total shares in issue, veto subordinate class B shares.
“Now is not the time to explore a transaction of this nature,” Keevil said in an April 3 statement, supporting Teck’s formal rejection of Glencore’s merger offer. In doing so, Teck is stating a preference for a previously announced demerger of its coal assets into Elk Valley Resources.
Unusually, the statement appeared to put Glencore on the back foot. But in a hastily arranged presentation, CEO Gary Nagle said he would press on with the offer without resorting to a cash sweetener. One possible outcome — on which Glencore is pinning its hopes — is that Teck’s class B shareholders vote down the coal Elk Valley demerger to force both transactions to be put before them. Teck’s demerger vote is scheduled for April 26.
Angus Aitken, founder of Aitken Mount Capital Partners in Sydney, says: “If you are a Teck shareholder, your main upside here is getting activist with the super-voting shares, as a tiny percentage of Teck is going to deprive value for the other 99% of normal Teck class B holders, which the instos [institutions] all own.”
Aitken supports Glencore’s merger bid, which offers a 22% premium to Teck in a share exchange that would leave the Canadians with 26% of a mega-company. Nagle’s plan is that the transaction would result in two standalone companies, one of them, MetalsCo, a pure-play battery minerals powerhouse with dominance in copper production. Nagle, as the FM has reported before, is bullish on copper and argues a “huge deficit” in the metal is coming.
The simultaneous spin-off of Glencore’s thermal coal assets and Teck’s coking coal mines, along with Glencore’s ferroalloys and Teck’s steelmaking assets — all to be combined in a CoalCo company — would satisfy Teck ambitions to reduce emissions and would fill a valuable gap in New York for a pure-play coal company of the kind investors continue to crave.
What’s more, Glencore’s offer would pave the way for other asset-level combinations with Teck on South American copper assets and render moot the intercompany arrangements envisaged by Teck’s own demerger proposal.
RBC Capital Markets, in a comment on the Glencore bid reported in the Financial Times, said: “Perhaps the most interesting dynamic … would have been the plan to demerge the coal business, and what would remain would be the largest pure-play base metals business in the world.”
Glencore estimates the transaction would release $15bn in a share rerate and generate synergy value of up to $5.25bn
Glencore estimates the transaction could release up to $15bn in a share rerate and generate synergy value of up to $5.25bn. Bank of America analysts say this might be understating the value release; Teck says Glencore is clearly overstating them. Teck also believes antitrust obstacles could delay the deal for 24 months, and it really doesn’t like the inclusion of Glencore’s oil trading division in MetalsCo.
These and other “issues” raised by Teck are “not issues”, Nagle said this week, quickly adding that he was not trying to dismiss Teck’s concerns. Rather his attitude is to do what a trader does best: get Teck’s newly appointed CEO, Jonathan Price, and colleagues around a table.
But when all’s said and done, a merger is a slippery concept. MetalsCo might be headquartered in Canada but a company based in Switzerland with South African roots will ultimately be calling the shots. Teck chair Sheila Murray said as much in a letter to her Glencore counterpart Kalidas Madhavpeddi; saddling up with Glencore removes “optionality” for shareholders, she wrote.
Looking ahead, Glencore might increase its offer, though that’s not generally in the firm’s DNA. Nagle ruled out paying a cash sweetener, which would imply a takeover — a concept he’s keen to suppress. He is also dismissive of the notion that in the event its offer for Teck fails, Glencore ought to just spin off its coal assets anyway.
Yet — and while coal has been spectacularly profitable for Glencore these past two years — coal assets have few vocal fans. “Diversified miners, particularly those with coal exposure such as Glencore and Teck, trade at much lower multiples,” Bank of America analysts note.
Still, Nagle told analysts on Monday that the coal demerger option for Glencore was frequently discussed with shareholders but they don’t want it. Glencore’s thermal coal assets, it should be remembered, comprised more than half of 2022 earnings before interest, tax, depreciation and amortisation.
One final reflection is what a merger attempt of this ilk might say about the mining market in general. It could herald the top of the market, at which optimism peaks. Or, as Bank of America said: “We do actually wonder if this could be more of a signpost to the beginning.”
Would you like to comment on this article?
Sign up (it's quick and free) or sign in now.
Please read our Comment Policy before commenting.