This analysis is by Bloomberg Intelligence Industry Analyst Sean Gilmartin and Bloomberg Intelligence Senior Industry Analyst Jason F. Miner. It appeared first on the Bloomberg Terminal.
The proposed merger of Livent and Allkem, which would create a $10.6 billion entity and potentially the third-largest lithium maker by 2027, may be the clearest sign yet that the moment for lithium M&A has arrived. Scale is crucial as demand for EVs and battery material surges. The new company has a credible path to 250 kt LCE capacity, which would place it behind leaders Albemarle and SQM.
Lithium industry appears poised for M&A wave
The proposed tie-up between Livent and Allkem may signal that an acceleration in M&A activity across the broader lithium space has arrived. A number of factors are at play, but we think the bottom line coalesces around three critical points. First, near- and longer-term demand projections remain robust and intact. The projected five-year compound annual growth rate of 20%-plus appear reasonable and may even be conservative. Second, after a record run higher in lithium prices last year, balance sheets across the major producers are solid and there’s cash to deploy for growth via increased capital spending and potential acquisitions. Third, prices have declined considerably in 2023 (see table below), likely making valuations more reasonable and serving as the potential final push for more junior producers to get deals done.
The good outweighs the bad for Livent
The proposed merger of equals between Livent and Allkem makes sense, we believe, for several reasons — scale, vertical integration with brine and hard rock assets, bolstered footprint across critical lithium geographies (Australia, Argentina and North America) and easily captured synergies given an overlap in assets, logistics and capital spending. Still, we think there could be some reasonable reservations from Livent shareholders. Livent has a clean, operational execution story and it has built momentum and credibility. Though we don’t think that disappears with the new combined company (NewCo), the narrative does become more complex. The deal’s structure also leaves Livent holders with a minority 44% stake in NewCo compared with Allkem’s 56%.
Accelerated scale a critical win for NewCo
The most crucial aspect of the deal, particularly for Livent, we believe, is that it will provide needed scale at a quicker pace with vertical integration across brine and hard rock assets. Given lithium-demand trends, we believe those with production scale have a distinct advantage over the next 5-10 years. Based on company projections for attributable lithium-output capacity (chart below), NewCo has a credible pathway to about 250,000 metric tons of lithium carbonate equivalent (kt LCE) by 2027. This would make it the third-largest producer of the chemical behind Albemarle and SQM.
Livent expects 2023 sales volume to be about 25 kt LCE on a standalone basis. Capacity has been a limiting factor, but the merger with Allkem could change that in a significant way.
Complementary skills, products, geographies
Outside the immediate increase in operating and commercial scale, the dovetailing portfolio overlap between Livent and Allkem further underlines why we think this deal makes a lot of sense. NewCo will boast a balanced product lineup across critical lithium materials, including spodumene, carbonate, hydroxide and specialties. These products have a myriad of important applications, but battery-grade hydroxide and carbonate for the all-important electric-vehicle market is most critical. NewCo will also be vertically integrated from both hard rock (spodumene) and brine assets, allowing for additional raw-material diversity and sharing of mining-process knowledge.
We also like the geographic footprint of NewCo, with exposure to Australia and the Americas. Overlap of operations in Argentina and Canada should allow for synergies.
NewCo can bring new group of investors
The combination may allow for a new tranche of investors as NewCo — with a market capitalization of about $11 billion — would be considered a large-cap lithium chemical maker. We think this stature opens the door not only for inclusion in more indexes, but for investors to seriously compare NewCo with Albemarle and SQM. At roughly 250 kt LCE by 2027, NewCo would have the production capacity to compete with both of those companies. It would be vertically integrated across brine and hard rock assets and have the ability to make battery-grade lithium chemicals. It would also carry a big enough market cap to be included in stock screens.
Standalone Livent and Allkem were each mid-cap companies with market values of $5-$6 billion as of May 9.
Bloomberg
Source link
