Glencore's Merger Proposal with Teck Resources: Coal, Metals, and Shareholder Concerns
With the ambition to solidify its dominance in key (green) metals and better address shareholder concerns w.r.t coal, Glencore has made an ‘all share’ $23bn offer for Teck Resources. While the latter has rejected the offer, there are expectations the that terms could be sweetened. Although the deal has benefits, we don’t expect Glencore to go over board. This deal – while another validation of (green) metals’ attractiveness – also sets an important precedent of how biggish sector M&A payment terms could be structured.
Glencore announced a merger proposal with Canadian diversified miner Teck Resources on March 26, 2023. The offer details include a $23 billion offer financed through shares, with an exchange ratio of 7.78 Glencore shares per Teck B share, translating into a 22% premium based on both firms' undisturbed closing price as of March 31, 2023. For Teck A shares, Glencore would offer 12.73 of its own shares, also translating into a 22% premium. Glencore and Teck shareholders would own 76% and 24% of the combined entity, respectively. The post-tax value of the synergies is estimated at $4.25-5.25 billion. Additionally, both Glencore and Teck plan to merge their coal assets, creating two separate entities focused on metals and coal, respectively.
However, Teck has quickly rejected Glencore's unsolicited offer, citing concerns about exposure to thermal coal and oil trading and stating that the planned separation of its metals and coal businesses would maximize value for shareholders.
Analysis
Glencore’s rationale
While we had been expecting biggish sector M&A to make a return – as kicking off newer/greenfield projects has become increasingly-difficult while green transition-driven demand opportunities are becoming increasingly-compelling – Glencore (and not the Aussie giants) taking the lead has come as a pleasant surprise. Moreover, the Swiss firm’s management deserves credit for two reasons: 1/ deciding to use its own highly-valued shares, despite the recent sell-off, as the acquisition currency and avoiding the temptation to use cash to fulfill its (copper) growth ambitions is perhaps an important indicator that ‘all-cash’ deals may never make a return; and 2/ with a proposed demerger of its coal assets along with Teck’s met coal assets, the firm would be in a better position to (quickly) address growing shareholder concerns w.r.t its coal exposure.
Looking at the deal terms – with a post-combination ownership ratio of 76%-24% for Glencore-Teck shareholders – the Swiss firm’s offer seems reasonable, considering the underlying opportunities and risks (discussed below). Although Teck has a high free float (c.98%), it is important to note that the Keevil Family (with a c.1% stake but the majority of the voting rights) could be a key bottleneck.
With the Teck Board immediately rejecting the offer, there are expectations that Glencore might sweeten the deal terms. But we are of the view that any ‘material’ improvement in the terms has a low probability and may not be in the best interest of the Swiss firm’s shareholders, considering that Teck’s shares are approaching a high unseen since 2011 while the (copper) mining profitability dynamics have normalised (considerably) since then. Also, given the looming operational challenges, especially in LatAm, (copper) mining could be difficult in the near-to-medium-term, despite supportive prices. This is perhaps also the reason why Glencore went ahead with an ‘all-share’ deal, despite valuable balance sheet strength being restored over the years. Lastly, (some) caution is warranted w.r.t Teck’s current valuation and it wouild be wise not to get carried away by copper promises – 45% of the total assets – given that a sizeable chunk of the firm’s 2022 earnings – similar to Glencore – was attributed to (met) coal market excesses (illustrated below).
Hence, sharing the risks via an ‘all-share’ deal makes a lot of sense.
While Glencore’s shareholder nervousness is obvious – as no major deal has been undertaken since the Xstrata days and the experience of past big deals has been nightmarish – we have confidence in the new leadership’s business acumen (which has also targeted the right areas post Ivan Glasenberg’s departure). This view is further supported by the firm’s operational resilience which has been achieved over the years.
On a separate note, any deal is likely to result in anti-trust negotiations/hurdles w.r.t the copper and zinc assets, given that Glencore is already a key producer of the aforementioned metals.
Reasons for Teck’s nervousness
While it is understandable that any miner (focused on green transition metals) is likely to believe that the value of its assets is way more than the current market assessment, Teck may also be worried about Glencore’s opaque trading business (>30% of gross assets), and legacy regulatory risks/challenges. Although Glencore has come a long way in terms of improving its reputation, a lot more needs to be done. Having said that, Teck’s shareholders may also want to objectively evaluate the benefits of in-house trading – primarily a better ability to withstand commodity market volatility and/or being able to sell one’s output at max prices, especially in situations of disrupted supplies (like in 2022).
Sector read-across
The offer for Teck is a good omen for Antofagasta (a Chilean copper proxy), where near-to-medium-term operational challenges could persist, but whose valuation may be supported by the renewed M&A appetite. While Teck had the courage (or perhaps greed) to dismiss the offer, the large-cap miners are likely to eye under-stress marginal/high-cost producers as bargain buys amidst the difficult operating environment in emerging/frontier markets.
If you are interested to learn more, we are organizing a webinar on Glencore and Teck this thursday, the 13th of April.
However, Teck has quickly rejected Glencore's unsolicited offer, citing concerns about exposure to thermal coal and oil trading and stating that the planned separation of its metals and coal businesses would maximize value for shareholders.
Analysis
Glencore’s rationale
While we had been expecting biggish sector M&A to make a return – as kicking off newer/greenfield projects has become increasingly-difficult while green transition-driven demand opportunities are becoming increasingly-compelling – Glencore (and not the Aussie giants) taking the lead has come as a pleasant surprise. Moreover, the Swiss firm’s management deserves credit for two reasons: 1/ deciding to use its own highly-valued shares, despite the recent sell-off, as the acquisition currency and avoiding the temptation to use cash to fulfill its (copper) growth ambitions is perhaps an important indicator that ‘all-cash’ deals may never make a return; and 2/ with a proposed demerger of its coal assets along with Teck’s met coal assets, the firm would be in a better position to (quickly) address growing shareholder concerns w.r.t its coal exposure.
Looking at the deal terms – with a post-combination ownership ratio of 76%-24% for Glencore-Teck shareholders – the Swiss firm’s offer seems reasonable, considering the underlying opportunities and risks (discussed below). Although Teck has a high free float (c.98%), it is important to note that the Keevil Family (with a c.1% stake but the majority of the voting rights) could be a key bottleneck.
With the Teck Board immediately rejecting the offer, there are expectations that Glencore might sweeten the deal terms. But we are of the view that any ‘material’ improvement in the terms has a low probability and may not be in the best interest of the Swiss firm’s shareholders, considering that Teck’s shares are approaching a high unseen since 2011 while the (copper) mining profitability dynamics have normalised (considerably) since then. Also, given the looming operational challenges, especially in LatAm, (copper) mining could be difficult in the near-to-medium-term, despite supportive prices. This is perhaps also the reason why Glencore went ahead with an ‘all-share’ deal, despite valuable balance sheet strength being restored over the years. Lastly, (some) caution is warranted w.r.t Teck’s current valuation and it wouild be wise not to get carried away by copper promises – 45% of the total assets – given that a sizeable chunk of the firm’s 2022 earnings – similar to Glencore – was attributed to (met) coal market excesses (illustrated below).
Hence, sharing the risks via an ‘all-share’ deal makes a lot of sense.
While Glencore’s shareholder nervousness is obvious – as no major deal has been undertaken since the Xstrata days and the experience of past big deals has been nightmarish – we have confidence in the new leadership’s business acumen (which has also targeted the right areas post Ivan Glasenberg’s departure). This view is further supported by the firm’s operational resilience which has been achieved over the years.
On a separate note, any deal is likely to result in anti-trust negotiations/hurdles w.r.t the copper and zinc assets, given that Glencore is already a key producer of the aforementioned metals.
Reasons for Teck’s nervousness
While it is understandable that any miner (focused on green transition metals) is likely to believe that the value of its assets is way more than the current market assessment, Teck may also be worried about Glencore’s opaque trading business (>30% of gross assets), and legacy regulatory risks/challenges. Although Glencore has come a long way in terms of improving its reputation, a lot more needs to be done. Having said that, Teck’s shareholders may also want to objectively evaluate the benefits of in-house trading – primarily a better ability to withstand commodity market volatility and/or being able to sell one’s output at max prices, especially in situations of disrupted supplies (like in 2022).
Sector read-across
The offer for Teck is a good omen for Antofagasta (a Chilean copper proxy), where near-to-medium-term operational challenges could persist, but whose valuation may be supported by the renewed M&A appetite. While Teck had the courage (or perhaps greed) to dismiss the offer, the large-cap miners are likely to eye under-stress marginal/high-cost producers as bargain buys amidst the difficult operating environment in emerging/frontier markets.
If you are interested to learn more, we are organizing a webinar on Glencore and Teck this thursday, the 13th of April.
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