Allkem shares up 4 percent as merger with US-based Livent Corporation edges closer

About Allkem

Allkem Limited (Allkem, the company, ASX:AKE) is a specialty lithium chemicals business that was created from the merger of Orocobre and Galaxy in November 2021. The company has hard rock assets in Western Australia and Canada, lithium brines in Argentina and a conversion plant in Japan. Allkem is dual listed on the ASX and the Toronto Stock Exchange (TSX).

Merger with Livent Corporation edges closer

Finalisation of the Scheme of Arrangement in connection with the merger of equals between Allkem and Livent Corporation (Livent) announced in May 2023, is edging closer. The Scheme will see a newly incorporated entity, Arcadium Lithium plc (Arcadium) eventuate out of the merger, by acquiring 100 percent of the shares in both companies.

The ownership share of the merged entity will be based on each company’s market capitalisation immediately prior to the merger announcement, resulting in Allkem shareholders owning 56 percent and Livent shareholders owning 44 percent. Livent’s shares lifted 5 percent and Allkem closed up 16 percent on the day following announcement of the merger proposal. Based on each company’s share price at the time of the merger announcement on May 9, the market value of the combined entity will be approximately US$10.6 billion (A$15.7 billion).

A merger of equals occurs when there is no cash exchanged between the shareholders of the merged entities because shareholders of each company consider that their respective shares were already appropriately valued by the market just prior to the merger being made public. The ownership share of the merged entity will be based on each company’s market capitalisation immediately prior to the merger announcement, resulting in Allkem shareholders owning 56 percent and Livent shareholders owning 44 percent. An advantage of a share for share exchange transaction is that it is expected to be a tax-free transaction for Australian shareholders.

Strategic and financial benefits of the merger

The key motivation in agreeing to the merger of equals is that both companies have complementary assets, growth opportunities and operating skills that when combined within a single entity will enhance shareholder value equally for both companies.

An obvious benefit of the merger is in the extraction of operating synergies and capital expenditure savings under the vertically integrated business models of each company. Both companies have brine operations in Argentina and spodumene projects in Quebec, Canada. Livent also uses more advanced brine processing techniques that should enhance operational performance at Allkem’s projects. These operations are geographically adjacent which increases the economies of scale of the projects and overall de-risks the pathway to approximately 250,000 tonnes per annum of Lithium Carbonate  Equivalent production.

The estimated run-rate operating cost synergies is US$125 million per annum from asset optimisation, logistics, and procurement savings. Other cost synergies include sharing of technological expertise, plant optimisation and enhanced marketing efficiencies. One-time capital expenditure savings are estimated at US$200 million from the consolidation of shared infrastructure by streamlining construction and procurement and leveraging complementary engineering work.

Next steps

Shareholders of both companies are expected to vote in favour of the merger proposal on 19 December. On the following day, the Federal Court will hear an application from Allkem seeking the Court’s approval of the merger. Following this, an Independent Expert concluding that the Scheme is in the best interest of Allkem shareholders, Arcadium, the merged entity, will have a primary listing on the New York Stock Exchange (NYSE) and maintain a foreign exempt listing on the ASX via the issue of Chess Depository Interests (CDIs) to Allkem shareholders. CDIs are an internationally accepted means of settling transactions in foreign securities.

The greater liquidity for investors through a primary listing on the NYSE, the strong balance sheet with combined liquidity of US$1.4 billion and limited indebtedness, backed up by annual earnings in excess of US$1 billion, and positive cash flow generation that enables an acceleration of the growth strategy, should see the creation of considerable shareholder value over the long-term.