By Breakingviews
Gary Nagle is sugaring the pill. The boss of $74 billion Swiss trader-miner Glencore (OTCPK:GLCNF)(OTCPK:GLNCY) on Tuesday tangibly sweetened the terms of his $22.5 billion deal to acquire Canada’s Teck Resources (TECK)(TECK.B:CA). The shareholders he’s trying to win over may still find the overall taste too bitter, though.
Nagle’s initial plan, outlined on April 3, would give Teck investors 24% of a huge miner focused on energy transition metals like copper, and a similar proportion of the two companies’ merged coal operations, which would later be spun off. Teck, meanwhile, has a pre-existing scheme to split its own much smaller metals and coal businesses, with investors holding 100% of each. The virtue of Nagle’s latest gambit is to take uncertainties over the valuation of the coal bit off the table.
Nagle is now offering Teck investors $8.2 billion in cash for the coal arm, or about 3.2 times the unit’s 2024 EBITDA on Visible Alpha estimates, as well as a share in the combined metals business. That may appeal to sustainability-focused investors who worry that their share in the dirty spinoff may be worth less than that, and not want to hold such polluting assets anyway. The downside is that Glencore’s own investors would also wind up with 100% of a much larger coal business, and take on debt to fund the cash payout. But the metals business’ leverage means it can probably swallow an extra $8.2 billion of borrowing.
Yet the cash doesn’t in itself solve Teck’s other complaints. These include concerns that the value of the combined metals business after the merger could be polluted by lumping it together with the potentially volatile revenues of Glencore’s oil trading arm. Glencore, meanwhile, reckons there are flaws in Teck’s own spinoff plan, because it would leave the metals unit still exposed to coal revenue.
Nagle also has a bigger headache. The majority of Teck voting rights are held by so-called A shareholders who already back the Canadian group’s own proposal. Sumitomo Metal Mining (OTCPK:STMNF)(OTCPK:SMMYY) and the Keevil family, for example, hold 48% of them.
If these shareholders decide that Teck needs to stay Canadian, Nagle’s Plan B may need more facets. Right now, Teck shares are trading only 3% below Glencore’s offer price. If Nagle wants to win, he may have to not only offer more cash, but a higher overall valuation.
Context News
Glencore on April 11 proposed introducing a cash component to its $22.5 billion bid for Teck Resources and urged its board to delay an impending vote on a restructuring. Glencore is now proposing that Teck shareholders receive 24% of the combined metals group and up to $8.2 billion in cash for those who may not want exposure to thermal coal, the most polluting fossil fuel. In response, Teck said that Glencore’s revised proposal “appears to be largely unchanged”. It added that the revised proposal “did not provide an increase in the overall value to be received by Teck shareholders or appear to address material risks previously raised by Teck”. Canada’s Keevil family, which has so far supported the rejection of Glencore’s bid, controls Teck through its dominant ownership of “A” class of shares, which have more voting power than the numerous “B” class shares held by institutions. As of 1542 GMT on April 11 Teck’s New York-listed shares had risen 0.5% to $43. Glencore shares rose 3.2% at 471.8 pence.
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