Glencore’s Teck takeover saga shows coal is just too hot to handle
Glencore’s ambition to take over Teck Resources has morphed into a protracted industry saga, and the Swiss commodities giant is now scrambling to win over the Canadian miner’s shareholders with promises of a third bid for the company.
Its initial two offerings for Teck – the first totalling £19bn and the second including a £6.6bn cash sweetener – were knocked back by the miner’s senior leadership, including top shareholder Norman Keevil.
Now, Glencore has gone to extreme measures, urging Teck shareholders in a public letter to reject the company’s own plans to spin off its critical minerals business from its coal operations at a crunch demerger vote this week.
The FTSE 100 company’s offer for Teck, which represented a 20 per cent premium on both its share classes, would have seen the both parties merge their minerals businesses and separately spin off their combined coal assets into a new listed company.
Glencore’s shareholders would own 76 per cent of the combined entity whereas Teck incumbent investors would hold the remaining 24 per cent.
Theoretically, Glencore is the perfect suitor for Teck.
It’s takeover attempt is a cool, rational attempt to diversify its business and shift towards future-facing minerals, which will be in high demand for wind turbines, solar panels and electric vehicle batteries as the world moves towards a greener future.
As Teck has vast copper resources and zinc deposits in the Americas, it’s a credible target for Glencore – and its bid follows rival BHP Group’s imminent £5.2bn takeover of Aussie copper producer Oz Minerals.
Meanwhile, Teck could benefit from Glencore’s sheer size and leading position in the commodities market.
Last year, Teck made £3.92bn earnings with shareholders clawing back £3.28bn.
By contrast, Glencore posted pre-tax profits of £28bn over the same period, and handed almost £6bn to shareholders amid widespread volatility in the economy and soaring fossil fuel prices.
However, Teck has proposals of its own to turn its business into two publicly listed companies.
This would include Teck Metals, focused on metals production, and Elk Valley Resources, built around its steelmaking coal assets.
Teck predicts its proposals could see its shares trade at a 55 per cent premium on its latest closing price.
Yet, the debate is not solely around contrasting valuations – a matter that would typically come to a resolution, with Glencore’s bigger size and revenue streams enabling it to present a figure that would finally appeal to Teck’s shareholders.
Instead, investors are highly divided over the proposed deal, because the true nature of the impasse is not finances, but coal.
Coal’s role causes shareholders headaches
Climate conscious Legal and General Investment Management (LGIM) has lent its support to Teck’s proposals, alongside Bluebell Capital Partners and Norway’s sovereign wealth fund.
Meanwhile, Glass Lewis has urged shareholders to support Glencore’s bid, and ISS has raised concerns over Teck’s break-up plans but stopped short of backing the Swiss firm’s proposed takeover.
Coal giants raked in massive profits last year, with the world’s top 20 companies raking in £77.8bn of collective earnings – but there are concerns with the long-term sustainability of such bumper numbers.
After all, this was an outcome driven by the pandemic and Russia’s invasion of Ukraine, with the International Energy Agency still expecting coal consumption to plateau around 2025.
Coal is also the world’s dirtiest fossil fuel, and with companies looking to divest to achieve net zero targets, it appears Teck’s board and many of its shareholders have seen the scale of Glencore’s large thermal coal business and oil trading businesses and opted against any negotiations.
Glencore has pledged to shift away from coal but its massive earnings last year included £7.6bn from its coal producing units – with the company mining 103.3m tons of coal through its industrial business.
The company faces scrutiny not just from Teck shareholders, but also its own investors over its climate ambitions.
Shareholders will vote at Glencore’s annual meeting next month on a resolution urging the company to explain how its thermal coal business aligns with efforts to limit the increase in global temperatures to 1.5 degrees Celsius, in line with the Paris Agreement.
HSBC Asset Management and LGIM are among signatories to the document.
While the company has previously pledged to cap coal production at 2019 levels and reach net zero emissions by 2050, banking group Credit Suisse does not expect a material decrease in Glencore’s coal production until 2036.
Coal is not the only headwind Glencore has to navigate in its bid to buy Teck.
The Canadian miner maintains a byzantine dual-shareholder structure – dominated by its A-shareholders.
This means Glencore will also have to coax the Keevil family, the company’s primary A-shareholders, into changing their mind over a deal.
With their dominant position in Teck’s corporate composition, doing this may be enough to push through a deal for Glencore.
However, with increasingly climate conscious B-shareholders, Glencore is going to need to resolve investor concerns over coal, unless it wants every push for growth to be a painful battle.