Everything you need to know about the Allkem and Livent merger

From key transaction details to the potential bump for Allkem's valuation. Here's everything you need to know about the $10bn merger.
Kerry Sun

Livewire Markets

Allkem (ASX: AKE) and US-based Livent Corp is set to merge in an all-stock US$10.6 billion deal to create the world's third-largest lithium producer by 2027.

M&A activity in the ASX-listed lithium space is running hot this year, following Albemarle's attempt to take over Liontown Resources (ASX: LTR) and IGO's (ASX: IGO) bid for Essential Materials (ASX: ESS).

Allkem shares are up 15.1% in early trade to a 7-month high of $14.84.

Transaction Details

The new company (NewCo) will have a market cap of $10.6 billion before synergies. The key details include:

  • Allkem shareholders: Will receive one share in NewCo for each existing Allkem share
  • Livent shareholders: Will receive 2.406 shares in NewCo for each existing Livent share
  • Ownership: Allkem shareholders will own ~56% of NewCo, Livent ~44%
  • Market cap: The combined market cap of NewCo will be $10.6 billion before synergies
  • Listing: NewCo's primary listing is on the NYSE plus the ASX via Chess Depository Interests
  • Timing: The transaction is expected to close by the end of 2023, subject to shareholder, regulatory and Australian court approvals

Merger Rationale: Scale & Vertical Integration

To put it simply, the combined businesses will have one of the world's largest lithium reserves and production capabilities that sit behind only that of Albemarle and SQM.

From a production standpoint, the NewCo has exposure to all major products including spodumene, carbonate, hydroxide and other specialties via the integration of hardrock/brine resources to chemical processing.

From Allkem's perspective, the company operates three brine projects (Sal de Vida, Olaroz and Cauchari) and two hard rock projects (Mt Cattlin and James Bay). At present, it has limited chemical processing exposure via its 75% owned Naraha Plant in Japan producing its first lithium hydroxide in late October 2022.

The narrative is somewhat the opposite for Livent, with less upstream exposure but more chemical processing capabilities via lithium hydroxide plants in the US, China and Europe (some of which are still in development). To add some perspective, 51% of Livent revenues came from lithium hydroxide sales in 2022 but only 9% came from lithium carbonate.

The companies expect an estimated run-rate of approximately $125 million in annual cost synergies by 2027 via factors such as:

  • Argentina-based projects for both companies are located within 10 km of each other
  • Hard-rock projects in Quebec are within 100 km
  • Streamlining of corporate costs
  • Flexibility to utilise feedstock
  • Shared infrastructure

Allkem's Potential Valuation Bump

"We see compelling combination rationale in listing the pro forma NewCo in the US given Allkem's discounted valuation of 5.8x/3.4x 23/24e EBITDA in addition to enhanced operational scale, aforementioned cost synergies, a perhaps more capital efficient profile in Canada/Argentina and a more de-risked funding profile," TD Securities said in a note on Wednesday.

"Livent currently trades at almost double the 2024e EBITDAX of AKE."

Livent Shareholders: The Short End of the Stick

The numbers for what shareholders will receive is a little interesting. To recap:

  • Allkem shareholders will receive 1 NewCo share
  • Livent shareholders will receive 2.406 NewCo shares

Allkem opened at $14.55 on Thursday and Livent shares closed at US$25.50 (A$37.60). For simplicity, we will convert all figures to AUD.

Based on Allkem's open, NewCo's fair value is $14.55.

But Livent shareholders are effectively paying $15.63 (A$37.60 divided by 2.406) or approximately 7% more.

For a Livent shareholder that wants exposure to NewCo, aren't you better off holding Allkem?

ASX lithium stocks: A sea of green

Share price performance as at 10:15 am AEST on Thursday, 11 May (Source: Market Index)

Less and Less Lithium

A little over two years ago, Orocobre and Galaxy Resources merged to create Allkem.

In a sense, we lost two companies with distinct characteristics (Orocobre for South American brine and Galaxy for Australia/Canada hardrock) for a more diversified play.

More recently, we have Albemarle trying to take out Liontown.

It’s a little sad to say that M&A is really reducing the breadth of names we have in the large cap end of town.

This article was first published for Market Index on Thursday, 11 May 2023.

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Kerry Sun
Content Strategist
Livewire Markets

Kerry is a content strategist at Market Index. He writes the Morning and Evening Wraps. He is an avid swing trader, drawn to technical set ups and breakouts.

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