I am not generally one for conspiracy theories, price manipulation and takeover speculation. However, if the PLS share price stays at current levels for an extended period, or falls further (either seems likely), it raises the very real possibility of a takeover. I would be very surprised if someone isn’t running the ruler over PLS (and AJM) right now, in anticipation.
At a price of $1.00 to $1.20 (55% to 85% premium to the current SP, as I write), PLS is valued at $1.9bn to $2.3bn. There aren’t too many industry players that can afford to shell out that much cash for one acquisition. ALB and SQM are large enough, but they have “hitched their wagons” to MIN and KDR. Tianqi would struggle to get that much cash out of China post their extravagant SQM investment. Too big for Ganfeng too I would suggest. The big Australian miners such as RIO are “gun-shy” re large scale M&A, having destroyed so much shareholder value during the last mining boom. POSCO already has what it wants from PLS – LOM supply – but might defend their position if an industry competitor made a bid.
The interesting prospect is Wesfarmers (WES). They were reported in the press as having looked at the MINRES deal. If true, they would have learned a lot, and they might be looking for a better opportunity. WES is an ASX20 company, has a market cap of $37bn, and trades at a PE ratio of 15.6. Post the Coles demerger, and some other asset sales, they have minimal debt. They are looking for growth opportunities, and being an ASX listed entity, can offer scrip and/or scrip and cash. PLS would seem to be a good fit with their already successful Chemicals, Energy & Fertilisers business. On my “back of the envelope” calculations (assuming stabilized PLS NPAT of $230m to $250m p.a. post stage 2), acquiring PLS at $1.20 with 50% cash and 50% scrip would grow WES EPS by 3% to 4% - that is very difficult to do when you are as big as they are. Continuing to trade at a PE ratio of 15.6 would create incremental value for WES of between $1.2bn and $1.5bn and potentially be seen by their investors as “smart” in comparison to the ALB/MIN deal. Securing a sizeable (19.9%) stake at less than $1.20 prior to bidding would increase the EPS impact. More importantly for WES though, they would be able to use their balance sheet and low cost of capital to fund further growth opportunities in the lithium sector – i.e. Stage 3, industry consolidation (AJM, Wodgina, KDR etc) and more significantly, downstream processing. There would be sufficient opportunity to become the dominant lithium chemicals player in Australia, and one of the largest in the world. All within their “backyard”.
25% of the share register is held by MIN and the offtakers. Would they support a TO at $1.20? As I understand it, the offtakers have only invested in PLS to assist in funding the mine development. Whilst their shareholdings no doubt strengthen their customer relationship with PLS, it does not give them any rights over and above the binding offtake agreements. I expect they would support a TO from a credible non-competitor, at the right price. MIN have their hands full right now with Wodgina, so they might take the cash.
As for me, I would accept $1.20 if it were offered right now.
I doubt that anything will happen for a few months given the ramp up, and only then if the SP stays at these low levels in the intervening period.
Also, I am not an M&A expert, or a keen WES follower (happy to hear considered thoughts from those that are), so there may well be a flaw in my logic.
Anyway, food for thought to distract us (actually me!) from the rather depressing SP.
AIMO.
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