Rockwood wants Talison

Rockwood Holdings (ROC-N) is bidding $6.50 per share — a 53% premium — for Talison Lithium (TLH-T) in a deal valuing the company at $724 million on a fully diluted basis.

The pure-play lithium producer’s board of directors has unanimously recommended the all-cash offer to its shareholders, noting that it is a 53% premium to Talison’s last closing price on Aug. 22, a 52% premium to its 10-day volume weighted average price of $4.28 and a 59% premium to its 30-day price of $4.08 per share.

Under the proposed acquisition, Rockwood — which has its own lithium division — would also have 100% of the options to acquire shares through an option scheme arrangement for $6.50 per option less than the exercise price.

Resource Capital Fund, which holds 36.8% of Talison, supports the acquisition if a superior offer doesn’t come along.

The news sent Talison’s shares up $2.26, or 53%, to close at $6.50 apiece, with more than 23 million shares changing hands. The company has traded in a 52-week range of $1.73 to $4.52 per share.

Jonathan Lee of Byron Capital Markets says the offer puts the company up for sale, and believes “that there may be a bidding war on a strategic basis that could result in a higher price above our fundamental target price of $6.55 per share.” Lee, a New York-based battery technology and materials analyst, reasons that FMC (FMC-N) needs more feedstock, and could enter with a higher bid. FMC, one of the world’s four big lithium producers, along with Talison, Rockwood and SQM (SQM-N), “is trading at higher multiples than Rockwood, and thus an all-cash purchase of Talison by FMC would be less dilutive to shareholders.”  

For its part, Rockwood already owns Chemetall, which is the world’s leading manufacturer of lithium-based compounds and a developer of metal-based fine chemicals for specialty applications. Chemetall has lithium production facilities in the U.S., Chile, Germany and Taiwan, and its lithium-based compounds are used in many applications, including base chemicals for industries, drug intermediates, elastomers for car tires and rubber soles, lithium batteries, thermoplastic materials and high-performance greases.

Lee argues Rockwood wants Talison to grow its lithium division. “Strategically it makes sense for Rockwood, as the company would become the dominant lithium producer,” he writes in a research note. “Rockwood would have a market share of over 50% of the lithium products sold into various industries.”

Talison is one of four producers — the other three are based in South America — that supply more than 90% of the world’s lithium requirements, according to company data. It has been supplying lithium from its Greenbushes operations located 250 km south of Perth, Western Australia, for over a quarter of a century, and became a publicly listed company two years ago.  

Dahlman Rose initiated coverage of Talison in May and rated the company as its top small-cap stock pick, owing to its growth profile and outlook for lithium markets. But analysts Anthony Rizzuto, Anthony Young and Joseph Giordano do not see a competing bid on the horizon. “No other entity could garner the same synergies as Rockwood can from Talison’s assets,” the analysts write in a note. “In our opinion, a limited number of entities would be interested in Talison’s assets, and we do not believe that a prolonged bidding war is likely.”

An agreement between Rockwood and Talison requires approval under Australia’s Foreign Acquisitions and Takeovers Act, as well as Talison shareholders. A shareholders’ meeting is scheduled for October, and a mutual break fee has been set at $7 million.

Earlier this month Talison inaugurated its plant expansion at Greenbushes, which doubles the company’s production to 100,000 tonnes of lithium carbonate equivalent per year — or about two-thirds of current global demand.