Glencore (GLEN) has launched a sharp change in direction on coal by planning a major takeover and company breakup that would see its assets combined with Canadian giant Teck Resources (US:TECK), and then split up.
The proposal said one company would hold the thermal and metallurgical coal mines, while the combined base metals mines and commodity trading businesses would be separate.
This comes after Glencore chief executive Gary Nagle and his predecessor Ivan Glasenberg had said the company would run their coal mines down to zero production and move away from the fossil fuel. Nagle confirmed that approach in February.
However, Teck rejected Glencore's all-share takeover offer, which was at a 20 per cent premium to its last closing price. The deal would have been worth around $23bn (£19bn) in cash terms. Teck has two classes of shares, with class A shares largely held by the Keevil family and worth 100 votes for each share.
Its current market capitalisation is around $19bn. Teck said it was an "opportunistically timed" approach that would "transfer value to Glencore shareholders at the expense of Teck shareholders". Its shares climbed 20 per cent on the offer, however, so there is some market confidence a deal could be found.
Earlier this year, Teck announced a plan to split into two companies, one holding copper and base metal operations and the other coal mines. Shareholders will vote on that arrangement next month. It included a provision that would transfer coal earnings to Teck Metals, the copper company.
The Canadian company said on the offer: "The Glencore proposal would force Teck shareholders to hold massive thermal coal exposure, which would be value destructive, drive away current and future investors who cannot hold thermal coal assets, and result in Teck’s world-class steelmaking coal business trading at a discount."
Glencore said the deal was fair. "The scale and quality of Glencore's business, together with its uniquely complementary footprint and strategic fit with Teck, including its strong and demonstrable commitment to being a responsible and ethical operator, make Glencore the obvious partner for an all-share merger with Teck, and a simultaneous demerger," the company added.
If a deal can be made, this would be Glencore's largest buyout since the Xstrata deal that turned it into a mining giant.
Its latest major deal was buying out BHP (BHP) and Anglo American's (AAL) stakes in the Cerrejon coal complex in Colombia. Coal earnings soared last year because of the price highs driven by very high demand for the fossil fuel. Its adjusted Ebitda figure hit a record $34bn last year.
In its rejection announcement, Teck also said Glencore's assets and businesses would not fit with its "ESG commitments". Chief executive Jonathan Price added: “The Glencore proposal would expose Teck shareholders to a large thermal coal business, an oil trading business and significant jurisdictional risk."
Key shareholder and former Teck chair Norman Keevil, whose family controls a third of the company through the preferential voting stock, also rejected the deal.
"Now is not the time to explore a transaction of this nature, and I have the utmost confidence in the board's and our management teams' strategy to maximise value for each of Teck Metals' and [coal spinoff Elk Valley Resources] shareholders after the separation," he said.
Bernstein analyst Bob Brackett said there was plenty of sense in a Teck/Glencore combination.
"The offer is very compelling — it would create a Tier 1 base metals company and a Tier 1 coal company," he said, although added that Teck's opposition to holding thermal coal assets would likely stop a deal happening.
But shareholders could force a rethink from the board - a no vote of 34 per cent from the class B shares could shoot down the company split next next month. Another suitor could also come along, without the oil and thermal coal exposure. "If we break down Teck's reasons for rejecting Glencore, it almost reads like an invitation for BHP," Brackett said.
