Glencore Fails With Its Second Bid for Teck Resources – Vahid Karaahmetovic
Glencore (LON: GLEN) and Teck Resources (NYSE: TECK) remain locked in an M&A drama after the Canada-based natural resources company rejected two unsolicited bids from the Swiss mining titan.
Earlier this month, natural resources mining company Teck Resources rebuffed an unsolicited $22.5 billion bid from Glencore. Teck said it rejected the offer as it does not want to expose its shareholders to the oil, thermal coil, and liquefied natural gas (LNG) sectors.
The bid, which was sent privately, was an all-share offer with a 20% premium to Teck’s closing stock price on March 26. In the proposal, Glencore also outlined a plan to simultaneously spin off the thermal and steelmaking coal business units, as well as rebrand the new company into GlenTeck.
Upon rejecting the bid, Teck voiced concerns that any merger of the two companies would expose its investors to Glencore’s big thermal coal business, an undesirable oil trading business, and notable jurisdictional risks. The zinc and copper miner believes that such exposure would negatively impact the value the company provides to its shareholders.
“The board is not contemplating a sale of the company at this time,” said Sheila Murray, Chair of the Board at Teck Resources.
Instead, more value could be generated through an overhaul proposed earlier this year that would see Teck spin off its steelmaking unit to focus more on copper and other industrial metals, the company argued.
Still, TECK shares soared on the bid as investors correctly anticipated that Glencore would return with another offer.
Teck daily chart (Source: TradingView)
‘Sweetened’ Bid Also Rejected
This week, Glencore sent an improved offer to acquire Teck, which the Vancouver, Canada-based miner also rejected. The sweetened bid included tweaks to the proposed restructuring plan, including the possibility for an earlier full spinoff of its metals and coal businesses.
In addition, the new offer also offered Teck’s shareholders 24% of the combined entity and up to $8.2 billion in cash for shareholders who do not want exposure to thermal coal – the most polluting fossil fuel in the world. The first bid did not offer a cash option.
“Now, pre-separation, is not the time to explore a transaction of this nature,” Teck Chairman Emeritus Norman Keevil said in a statement.
Glencore’s new bid had no material changes, and was still not in Teck’s best interest, the mining company said. It also said that the modified restructuring plan would now involve a shortcut to completely separate Teck Metals – the company’s copper and zinc business – from the steelmaking coal unit Elk Valley.
In addition, it would cut the minimum term of the royalty to Teck Metals from 5.5 years to 3 years. The revised plan also included place measures to restrict annual capital spending by the coal unit at $1.3 billion.
“The split makes sense and the original way was a pretty messy way of doing it because of the length of the royalty payment, but when I am given the choice between the status quo or the new plan, I have to go with the new plan,” said Bob Bishop, boss of Impala Asset Management, which owns both ‘A’ and ‘B’ class of shares in Teck.
The second bid was rejected as several Teck shareholders urged Glencore to further improve its bid for the mining company earlier this week, arguing the latest bid was still strong enough for them to challenge Teck’s own revamp plans.
Glencore CEO Gary Nagle was reportedly on his way to Toronto on Thursday to personally meet with some Teck shareholders and try to persuade them into backing the deal.
“The cash component is an improvement, but a higher bid would be required for me to consider changing my vote,” said Addenda Capital’s Todd Kapala. Addenda holds roughly 710,000 Teck shares.
Another Teck shareholder said Glencore’s enhance bid still failed to reflect the expected future value of a combined company that has the potential to become one of the biggest copper producers on the globe.
“The premium doesn’t seem sufficient for me to get excited, considering where Teck is headed,” said Jonathan Case, a Vice President and portfolio manager at CI Global Asset Management, which owns almost 5 million Teck shares, representing around 1% of the company’s free float.
Sector Consolidation
Glencore’s efforts to buy out Teck represent the latest in a wave of acquisition offers in the mining sector recently, driven in part by global opposition to new mine construction and growing demand for copper, a metal playing a central role in the shift to green energy.
Earlier this year, the Swiss commodity trading and mining company disclosed a $7.1 billion payout to its shareholders after reporting a record annual profit fueled by elevated oil and coal prices. The payout consisted of dividend payments and a $1.5 billion share buyback, the company said.
On the other hand, mounting costs related to mineral production could hurt future earnings, Glencore warned. In its preliminary 2022 financial report, Glencore said it reduced net debt to $75 million at the end of the year, from a whopping $6 billion in 2021. Adjusted earnings before interest, tax, depreciation, and amortization (EBITDA) surged 60% to $34.1 billion, up from the previous record of $21.3 billion a year ago.
Nagle said the company’s new record profit was made possible because of high and volatile commodity prices driven by a set of factors such as the Covid-19 pandemic, supply chain constraints, geopolitical tensions in Europe, and under-investment.
Hargreaves Lansdown analyst Matt Britzman said Glencore is “taking full advantage” of the chaotic energy market, adding “there’s good news for shareholders as they get to share in the spoils.”
Profit from metals and fossil fuels trading rose to a record high of $6.4 billion last year, marking a year-over-year growth of 73%. However, analysts said that such performance is unlikely to happen again in 2023 or next year.
Meanwhile, thermal coil prices halved from their all-time high reached last year as mild weather weighed on demand.
Summary
Glencore failed with its second bid to acquire Canadian Teck Resouces and it is still not clear whether the Swiss mining giant will come back with the third offer. While Teck’s management is adamant they are not interested in a sale, the company’s shareholders invited Glencore to increase the offer.
