Glencore Lobs USD 45 Per Share Offer for Teck

No-moat Glencore GLEN has offered about USD 45 (or CAD 61) per share to buy no-moat Teck Resources TECK in an all-share transaction via a plan of arrangement. The offer represents a 20% premium to Teck’s share price before the proposal was presented to Teck and is around 7% above our previous bull-case fair value estimate for Teck of USD 42. Under the proposal, the combined entity, or MetalsCo, would retain its copper, nickel, and zinc businesses along with most of Glencore’s marketing business. The companies’ combined coal businesses would subsequently be demerged to create a standalone business, or CoalCo. The proposal is subject to regulatory and shareholder approval but not subject to due diligence, though Glencore has offered mutual due diligence to Teck.

Despite the material premium, Teck rejected the offer, arguing that it undervalues the company. Teck also believes it is inferior to its proposal to demerge and spin off its metallurgical coal business, to be renamed Elk Valley Resources. Glencore can now either raise its bid, pitch directly to Teck shareholders, or walk away. It is also possible that other bidders emerge, particularly given the attraction of Teck’s substantial copper growth pipeline. For now, we think Teck shareholders should sit tight and see if a superior offer is forthcoming.

We raise our fair value estimate for Teck to USD 40 per share from USD 28.50. This is based on our previous fair value estimate for Glencore of GBX 600 per share and assumes a 50% chance that Glencore’s offer is successful. Glencore and other potential bidders will need to move quickly if they want to stop the EVR spinoff, which Teck shareholders will vote on at a meeting scheduled for April 26, 2023. If no deal eventuates before then, all else equal we would revert to our stand-alone fair value estimate for Teck of USD 28.50 per share. We modestly reduce our fair value estimate for Glencore to GBX 560 per share from GBX 600 due to dilution.