Allkem/Livent: Lithium deal looks underpowered for smaller partners

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 eased and lithium supply has increased. With valuations down, the sector is poised to strike deals.

Cue Australian Allkem and US rival Livent. The two companies are merging in an all-stock merger valued at $10.6 billion. The deal will create the world’s third-largest lithium producer by estimated future capacity.

Allkem shareholders will own 56% of the merged company, meaning their business is the buyer. It does not provide any obvious check rewards. Its offer prices Livent at approximately $21 per share, a slight discount from the latter’s 3-month average of $22.

This is a bit strange. Lithium miners are still racking up premiums for rivals despite weak metal prices.

Industry leader Albemarle has prosecuted Australian start-up Liontown Resources. Its latest offer of A$5.5 billion ($3.7 billion) represented a 63% premium over Liontown’s closing the previous day. Similarly, China’s Tianqi Lithium has offered a 42% premium to buy Australian explorer Essential Metals, even though the deal failed.

Livent shareholders will end up with 44% of the combined company. They will contribute less than a third to the group’s EBITDA, although these gains are worth more than Allkem’s. Livent management will handle the combined business.

Livent shares rose more than 5% Wednesday to trade at $25.64, possibly in anticipation of a rival bid. Potential cost savings could have been another stimulus. Estimated at $125 million annually, this would be worth about $1 billion taxed and capitalized. This would add up to a one-time capital savings of $200 million.

Bulking up is a sensible thing to do for Allkem and Livent. Fields of new lithium mines will open in the coming years. The domain will go to the largest and lowest-cost producers. If the combined entity is one of these, investors will be well rewarded. Otherwise, Livent shareholders may regret the terms of this agreement.