One of the largest holdings of popular Australian ETF ACDC is merging with fellow Australian lithium miner Orocobre in a $1.78 billion deal that will create the world’s fifth-largest lithium company by market capitalisation.

In a deal announced on Monday, Orocobre (ASX: ORE) will acquire 100 per cent of Galaxy’s (ASX: GXY)shares. The new $4 billion market cap firm will be Australia’s most valuable lithium miner and is expected to be included in the ASX 200.

Orocobre chairman Robert Hubbard said size would be an advantage for the new company.

“The logic of this merger is compelling. Both Orocobre and Galaxy shareholders, will benefit from the diversification, growth and scale of a top 5 global lithium chemicals company,” he said in an ASX release.

Galaxy Resources makes up 6.35 per cent of Australia’s best performing ETF of 2020 ACDC, as of April 19. ACDC offers investors exposure to energy storage and the supply chain for the production of batteries.

The combined firm will have lithium brine, hard rock, and chemical assets in Argentina, Australia, Canada, and Japan.

The merger comes amidst soaring demand for lithium, batteries, and electric vehicles. Prices of lithium carbonate, central to the lithium-ion batteries used in electric cars, have soared. Chinese spot prices rose 90 per cent between December 2020 and end of March this year.

Orocobre closed Monday at $6.55, up 5.65 per cent from its Friday close. Galaxy Resources closed $3.83, up 6.09 per cent from its Friday close. Neither stock is covered by Morningstar.

Galaxy Resources and Orocobre, 1-Yr

Share prices orocobre and galaxy resources

Galaxy Resources – Red / Orocobre – Blue.

Source Morningstar Premium

Orocobre chief executive Martín Pérez de Solay will head the new firm. Galaxy chairman Martin Rowley will head the board. Its head office will be in Argentina, with a corporate headquarters on the Australian East Coast.

The firm will have US$487 million in cash on its balance sheet to deliver its project pipeline.

While Galaxy may benefit from Orocobre’s experience bringing its lithium brine project “Sal de Vida” online, Morningstar analyst Seth Goldstein says the companies have separate competencies in the lithium space.

“While this forms a large lithium company that should benefit from growing EV adoption and higher lithium/spodumene prices, I question management’s synergy estimates as the separate competencies should require the existing overhead costs to remain in place,” he says.

“However, the merger to form a larger lithium player isn’t surprising and we could see additional consolidation among smaller players.”

The merged company joins the top league table of lithium producers after Chinese firm Ganfeng Lithium Co (002460), US listed Albemarle (ALB), Chilean giant Sociedad Quimica y Minera de Chile (SQM), and Tianqi Lithium Corp (002466).

Narrow moat Albemarle closed Monday at $157.50, above Morningstar's fair value estimate of $140. Narrow Moat SQM closed at $55.66, just above Morningstar's fair value estimate of $55.00.

The new Galaxy Resources – Orocobre entity would add to ACDC’s stable of lithium producers which includes Mineral Resources Ltd (ASX: MIN) and Livent Corp (LTHM), but none of the other majors.