The Allkem Ltd (ASX: AKE) share price will be one to watch closely on Thursday.
That's because the lithium miner released a major announcement after the market close yesterday.
Why is the Allkem share price on watch?
It might be a case of déjà vu for longer term shareholders after Allkem announced an agreement to merge with lithium giant Livent Corp (NYSE: LTHM).
According to the release, Allkem, which was formed via the merger of Galaxy Resources and Orocobre, plans to combine with Livent in an all-stock merger of equals to create a US$10.6 billion (A$15.7 billion) leading global lithium chemicals producer.
Management expects the transaction to close by the end of calendar year 2023, subject to approvals. After which, upon closing, Allkem shareholders will own approximately 56% of "NewCo" and Livent shareholders will own the balance.
NewCo will have a primary listing on the NYSE and maintain a foreign exempt listing on the ASX.
Why merge?
The release highlights that the merger will combine a highly complementary range of assets, growth projects, and operating skills across extraction and processing under a vertically integrated business model with the scale and expertise to meet the rapidly growing demand for lithium chemical products.
It also highlights that the proximity of certain assets in Argentina and Canada means that significant cost synergies and capex savings, in addition to other anticipated commercial synergies, are expected to be realised from the opportunity to co-develop and de-risk future expansion projects and operations.
NewCo's run-rate operating cost synergies are estimated to be approximately US$125 million (pre-tax) per annum from SG&A, asset optimisation, and logistics and procurement savings. In addition to operating synergies, NewCo is expected to realise approximately US$200 million in one-time capital expenditure savings.
'Transformational'
Allkem's CEO, Martín Pérez de Solay, commented:
The combination of Allkem and Livent is transformational with compelling strategic logic and marks a significant milestone in our efforts to grow the company. We are bringing together two highly complementary businesses to create a leading global lithium chemicals company, building on Allkem's demonstrated track record of integration.
The vertically integrated NewCo will improve delivery of high-quality, value-added products to our diverse customer base and unlock material synergies. The combination brings together teams with strong expertise in project development, product innovation, and marketing, and sets us up for a faster and de-risked delivery of the next phase of our growth. I believe Allkem shareholders will realize significant benefits from the Transaction as the business transforms into a truly global player with listings in the US and Australia.
What does the transaction mean for Allkem shares?
The release highlights that the transaction implies a premium of approximately 14% to Allkem shareholders measured using volume weighted average share prices over the one-month period from April 10 to May 9, 2023.
This premium is calculated assuming Allkem shareholders contribute their shares to the merged entity at an implied price of A$13.54 per share, calculated using the Livent one month volume average weighted price over the same period of US$21.81 (A$32.17), the agreed exchange ratio of 2.406 NewCo shares per Livent share, and the daily USD:AUD foreign exchange rates over the period.
However, it is worth highlighting that both the Allkem share price and the Livent share price have risen meaningfully from these averages.
At the time of writing, the Livent share price is fetching US$25.05 (A$36.95), which based on that exchange ratio, implies a value of approximately A$15.36 for Allkem shareholders. Based on the current Allkem share price of $12.91, this represents an 18% premium.
