Ann: Update on Albemarle proposal, page-173

The way I see it, there are two likely scenarios given how things stand today.

1. HPPL strike a deal with ALB (which is allowable under a Scheme of Arrangement)
2. No deal is achieved, in which case a vote on the scheme would be unlikely given HPPL’s substantial holdings.

Right now, I think a rival bid is highly unlikely due to HPPL’s blocking stake. If a deal between ALB and HPPL is reached, then it opens the door for a rival bidder if they want to work with HPPL and HPPL see value in working with them.

Under scenario 1, if there is a side deal between the two parties then an “extraneous commercial interest” would exist, requiring HPPL to vote under a separate share class or abstain from voting (the result would be the same for them either way).

If this is the case, of the 2.2b shares on issue, approximately 25 percent would no longer be part of the voting pool (combining HPPL and ABL’s holdings), leaving about 1.65b votable shares.

The top 25 shareholders have around 60 percent of the total shares (according to **.st) but excluding HPPL and ABL it’s closer to 40 percent (about 880m shares). In the event each of these holders vote in favour of the scheme, it would reach about 53 percent support. Institutional holders may choose to abstain from voting given they tend to be passive funds, although I haven't confirmed this. If this was the case it would change the numbers but the idea remains the same.

To recap, for the scheme to be approved, two conditions must be met:

1. 75% of votes cast (1 share = 1 vote)
2. Greater than 50% of target shareholders voting (1 holding = 1 vote)

If voter turnout was low, then this 53 percent may be enough to satisfy the first condition (I won’t speculate on voter turnout, but evidence suggests 47% to 90%) .

Where your everyday investor holds influence is under the second condition. Although slightly outdated given events over the recent months, the annual report shows a bit over 28,000 shareholders on the books. This may have gone up or down, but not substantially. While HPPL would have bought a lot of shares from retail in the first days, in the later half I suspect it largely came from within the top 20.

I say this for two reasons.

1. Non-board members or related parties within the top 20 would have been sounded out prior to any agreement. This is common practice by boards to avoid any pushback or an egg on face situation. Considering the board unanimously recommended the proposal, I think it’s safe to say those larger holders were also supportive of it (i.e. they were happy to sell at $3).
2. This brings us to the second reason. Comparing the top 20 from the Annual Report to the top 25 on **.st, you can see those big, non-related holders have sold out. Which makes sense – they were happy to sell at $3 and they most likely sold at $3 given the reports of the ring around.

To get back to the second condition, even if there is a 50 percent voter turnout, that’s some 14,000 holders which are (potentially) happy to vote No (otherwise they should have sold at $3 and taken their cash sooner). Simple maths, 14,000 > 25.

So, if HPPL strike a deal with ALB, the SOA can still be voted down through the power of the people. I think this is the only situation where ALB (or a rival) would launch another bid. The board is satisfied, HPPL are satisfied, so it’s only retail that would need convincing, and the only way to do that would be through a higher bid.

Now in the second scenario, no deal has been agreed on and as such, HPPL would vote within the same class as everyone else. The same conditions exist as stated above which pretty much means there is zero chance of the deal going through (given HPPL’s holding size). Knowing this, I don’t think the deal would progress to a vote. While it would reflect badly on the board of ALB to withdraw, it would be a lot worse for them to continue only to be voted down, knowing the chance of success was almost zero.

If this is the outcome it will be BAU for LTR in the short term. Regardless of the 4-month rule, it wouldn’t be worth ALB coming back with a revised offer unless a satisfactory deal had been agreed with HPPL. If so, we are back at scenario 1. The same applies for an alternate bidder.

I don’t know what impact HPPL’s ownership has on the everyday operations of LTR, but obviously they want some sort of say. HPPL may want to work closely with LTR (no takeover) to help extract full value from their assets - as shareholders we would benefit from this, maybe not in the short-term but definitely in the long-term.

Alternatively, HPPL's aim could be an acquisition of LTR. HPPL can continue to build on their holdings by up to 3 percent every 6 months – so maybe an extra 6% by the time LTR is producing and shipping. By then shareholder expectation and company value would have shifted.

As yet, HPPL haven’t put forward anyone for the LTR board, but if they did I don’t think there would be any change in the treatment of HPPL’s holdings if it came to a vote – they would have to abstain. I can’t verify the impact of HPPL personal sitting on the LTR board, but I can’t imagine HPPL forming a majority.

The LTR board wasn’t willing to accept anything below $3 so I would expect the same in the future. If HPPL did want to launch a takeover, they would need the support of the board and that support currently costs $3.

If HPPL make a bid in the next 4 months, it must be at least $3 (minimum bid price rule). If no bid, then we’re just ever closer to producing, shipping, and dividends. If beyond that point HPPL want to takeover, the price will have hopefully increased beyond $3, meaning any offer would need to be above that

The ALB deal will likely fall through, and if it does, it’s because HPPL doesn’t see value in having them around. We may see some short-term volatility but if HPPL want to capitalize on this and make an offer, it has to be at that minimum of $3 . Knowing the board has already recommended this price, it wouldn’t surprise me if they came through with the exact same offer, only now there would be no third party to block the deal. If going down the SOA route, retail shareholders could still create a headache. If a Takeover Bid was launched, then again retail holders hold substantial power given they still make up 35% of share ownership – takeover would require 90% approval.

I saw something during the week regarding HPPL and $3 never being on the table again. I think for larger shareholders this is important, simply because it’s incredibly difficult to offload 10s or 100s of millions of shares (I imagine) without crashing the share price. For the rest of us, we can still benefit from a rising share price and comfortably sell if required at a price we're comfortable with.

If anyone wants to dig a little deeper or verify parts of the above, the Allen's Takeover Handbook is very good (Allen's are one of LTRs advisors on the ALB deal) as well as takeovers.gov.au being a good resource.

And to finish on a fun fact, right now it doesn’t cost you much more than 1.2m shares to be sitting on the top 25 list of shareholders (**.st).