Allkem/Livent: lithium deal appears underpowered for smaller partner

Lithium prices have collapsed this year after a two-year rally. Miners of the white metal, a key ingredient in electric vehicle batteries, have had two nasty shocks. Chinese demand for EVs has softened and the lithium supply has surged. With valuations falling, the sector is ripe for dealmaking.

Cue Australia’s Allkem and US rival Livent. The two companies are combining in an all-stock merger worth $10.6bn. The deal will create the world’s third-biggest lithium producer by future estimated capacity.

Allkem shareholders will own 56 per cent of the merged company which means their business is the acquirer. It is providing no obvious control premium. Its offer values Livent at around $21 a share, a slight discount to the latter’s 3-month average of $22.

This is a little odd. Lithium miners are still stumping up premiums for rivals despite weak metal prices.

Industry leader Albemarle has been pursuing Australian start-up Liontown Resources. Its last offer of A$5.5bn ($3.7bn) represented an eye-watering 63 per cent premium to Liontown’s prior day close. Similarly China’s Tianqi Lithium offered a 42 per cent premium to buy Australian explorer Essential Metals, though the approach flopped.

Livent shareholders will end up with 44 per cent of the combined company. They will contribute less than a third of group ebitda, though those earnings have higher value than Allkem’s. Livent management will be running the combined business.

Livent shares rose more than 5 per cent on Wednesday to trade at $25.64, perhaps in anticipation of a rival offer. Potential cost savings could have been another stimulus. Estimated at $125mn a year, these would be worth about $1bn taxed and capitalised. That would come on top of one-time capital savings of $200mn.

Bulking up is a sensible thing for Allkem and Livent to do. Swaths of new lithium mines will open in the next few years. Dominance will go to the largest, lowest cost producers. If the combined entity is one of them, investors will be well-rewarded. If not, Livent shareholders may regret the terms of this deal.