Analysis-As Aussie magnates gatecrash lithium deals, bankers get creative

By Melanie Burton

MELBOURNE (Reuters) – Australian mining moguls who have gatecrashed the country’s recent international lithium deals have pushed bankers into trying fresh measures to fend off interlopers unwilling to pay the full price for their target.

Australia’s vast lithium deposits needed for batteries for electric vehicles and the energy transition are drawing interest from global chemicals makers but local mining moguls Gina Rinehart, the country’s richest person, and Chris Ellison have already thwarted two deals and threaten another.

While Rinehart’s Hancock Prospecting and Ellison’s Mineral Resources have refrained from full takeovers of the companies in the local lithium sector, their tactical efforts to keep foreign companies from doing so gives them time to establish a stronger footprint in the emerging industry.

Hancock disrupted a proposed $4.3 billion deal between Australia’s Liontown Resources (ASX:) and top lithium maker Albemarle (NYSE:) after it bought a 19.9% stake in the lithium developer, enough to block Albemarle’s bid under Australian law.

Hancock and Mineral Resources are threatening the same with the deal between Azure Minerals (AX:) and Chile’s SQM, the world’s second-biggest lithium chemicals maker, after the companies accumulated shares of 18.9% and 13.6%, respectively.

In taking the stakes, Hancock has underscored its expertise in building mining projects, while Mineral Resources has said it wants to be part of projects that will sustain its growth for decades. Neither company has made an outright bid for Azure or Liontown.

Hancock and Mineral Resources declined to make additional comments.

Building these stakes offers influence over lithium developers for less money than a full takeover, and an option to take a bigger part in the growing industry, which will include downstream processing, said Marc Upcroft, a partner at PwC in Australia.

“If you have a blocking stake, that means that no one else is going to be able to easily come in and take control of the project. Then you’ve effectively, for a smaller price, built your role to play with that project going forward,” he said.

Falling lithium prices over the past year, leading to lower stock prices for the developers, have propelled the interest in the acquisitions, along with the outlook for surging demand for the metal.

As well as Liontown, Core Lithium (OTC:), Leo Lithium Latin Resources Patriot Metals, Chalice, Centaurus and Rex Minerals have all been cited by brokers as buyout prospects.

TWO-PRONGED SOLUTION

Their deep pockets, risk appetite and Australia’s competition laws means mining magnates have a home advantage against listed companies, industry sources say.

“M&A in Australia is a rough game and home players have a big advantage especially when it’s private money,” said a financier at a global bank active in the lithium space, who asked to remain unidentified because of company policy.

One example that bankers offered in the case of SQM’s bid for Azure was a two-pronged solution to erode any interloper advantage.

SQM’s $900 million offer for Azure was set up as a so-called scheme of arrangement which must be court-approved and where 75% of voting shareholders must also back the plan.

The offer also included an off-market takeover option where SQM could go directly to shareholders if the scheme of arrangement should fail because an interloper accumulated 19% of the stock.

This dual-pronged approach has only been done in Australia six times, said Richard Lustig, head of Australian M&A at law firm Baker McKenzie in Melbourne.

“It started as a curiosity, now it’s getting some kind of traction,” he said.

The dual offer is useful for firms that are open to holding less than a 100% stake.

It offers a route for shareholders to accept a direct offer if an interloper appears, which can be faster than waiting months for the scheme of arrangement to complete.

It becomes harder for an interloper to build a blocking stake, and they are faced with the prospect that a bidder can take control even if they block the scheme, potentially leaving them as a minority shareholder and eroding their influence over the target firm.

“If there is a concern a scheme may get blocked by an existing shareholder or an interloper who has no intention of making an offer for the whole company then yes, this structure will be used more often,” said a second banker involved in global lithium acquisitions.