Lithium mega-merger 'makes strategic sense'
Shares in ASX lithium miner Allkem are soaring on news of a merger with US competitor Livent Corp. We dig into what the deal means for investors.
Mentioned: Arcadium Lithium PLC (ALTM)
ASX lithium producer Allkem (AKE) is expected to merge with US competitor Livent Corp (LTHM) before the end of the year, in a deal that would see former Woodside boss Peter Coleman step up as chair of the new lithium large-cap.
Under the all-stock merger, Allkem shareholders would take the majority 56% stake in the resulting company, called NewCo, which would have a combined value of $15.7 billion.
Morningstar strategist Seth Goldstein says the merger makes strategic sense for Allkem and Livent.
“Allkem and Livent are currently the fifth- and sixth-largest lithium producers, respectively. Both are amid large capacity expansions and operate in similar locations.”
“For example, both are developing a spodumene project in Canada, less than 100 kilometers away from one another. Also, both operate brine-based resources in Argentina, with the potential to realize reduced capital expenditures at Allkem's Sal de Vida project, located near Livent's Hombre Muerto operation,” he says.
According to Allkem, one-off capital expenditure savings from the merger are expected be in the region of $200 million.
Following news of the deal, Morningstar raised its fair value estimate for Livent shares by 10%, but Goldstein notes that the company remains materially undervalued amid a strong demand outlook for lithium.
“Given our view for the lithium market to remain undersupplied through at least 2030, leading to prices above the marginal cost of production, we view [Livent’s] current share price as an excellent entry point for long-term investors.”
Under the terms of the deal, former Woodside boss and current Allkem chair Peter Coleman will step up as chairman of the combined company and current Livent CEO Paul Graves will retain the chief executive position.
Allkem CEO Martín Pérez de Solay is expected to remain on to “provide consulting services to help facilitate a smooth integration”. In an announcement to ASX shareholders late on Wednesday, Pérez de Solay called the merger “transformational”.
“I believe Allkem shareholders will realise significant benefits from the transaction as the business transforms into a truly global player with listings in the US and Australia,” he said.
Goldstein doesn’t anticipate the proposed merger will run into regulatory hurdles, anticipating the deal will likely close as proposed.
Livent’s existing NYSE listing will be retained as the new company’s primary share float, with Allkem’s ASX shares set to become re-listed as CHESS Depository Interests. The new company is also expected to seek inclusion in the S&P/ASX 200 index.
The deal arrives two years after Allkem was first created in a merger between former ASX-listers Oorocobre and Galaxy Resources.
Shares in Allkem rocketed 14% higher on Thursday morning after news of the deal broke late on Wednesday.
More from Morningstar about investing in lithium:
Investing in the electric car revolution
We’re in a once-in-a-generation shift in demand for metals