Anglo-Teck gatecrashers should bide their time
Rivals keen to bulk up their copper holdings might get a better chance once the deal closes
Miners are an acquisitive crowd, and copper is a glittering prize. So with a month to go until shareholders in Canada’s Teck Resources and the UK’s Anglo American vote on their proposed all-share tie up, there is still time for an interloper to appear. Some investors hope that will indeed happen. But this deal isn’t an easy one to disrupt.
Rio Tinto, for example, is being encouraged to gatecrash Anglo and Teck’s merger by activist Palliser Capital. Rio might very well be interested. Add Teck’s copper to its own portfolio and the result is a 1.3 metric-tonne producer of the red metal. Rio would diversify itself further beyond iron ore, and fast-forward its copper ambitions by something like a decade.
But to make any bid attractive to Teck shareholders, Rio would have to destroy value for its own. Say it could shave $800mn of annual combined costs: taxed and capitalised, that would create roughly $5bn of value. Even if it gave all that to Teck’s shareholders, layering it on top of Teck’s undisturbed market capitalisation, Rio would struggle to pay more than $22bn. Teck’s market value has already risen to $21bn.
Even if Rio could produce a credible offer — to the presumable detriment of its own shareholders — Anglo could easily deflect it, thanks to the $1.4bn in “ebitda uplift” it has identified on top of $800mn of cost cuts. As things stand, Anglo’s merger proposal gives some of the transaction’s notional value creation to Teck but keeps a large chunk for itself. It has room to tweak the merger ratio to give Teck a bigger slice.
Miners have a long and colourful history of value-destructive mergers. Just because potential interlopers shouldn’t strike now, doesn’t mean they won’t. And there are other ways in which this betrothal could be broken up. Anglo itself could become a bid target; BHP has eyed it up before. There’s red tape to negotiate too. Under the Investment Canada Act, too, the country has to wave the transaction through for it to complete.
A would-be usurper with time on their hands might be best advised to sit tight. Should Anglo and Teck complete their merger, a bigger rival might be able to take a run at the entire, combined company. After all, the Keevil family, which currently wields super-voting shares in Teck, will no longer hold veto power. And, while a significant chunk of the assets would still be in Canada, Ottawa’s influence might be lessened.
The question, then, isn’t whether another miner would like to snap Teck up. It’s just that if they attempt to do so before next month’s vote, they will find Anglo hard to dislodge. But if they wait until the newly merged company lists in London, they may find the political terrain easier. The merger with Anglo may not be Teck’s last big deal.