Livent-Allkem Merger Will Create a Lithium Giant: What Investors Should Know

Pure-play lithium companies Livent (LTHM), based in the United States, and Allkem (OROCF), headquartered in Australia, announced last Wednesday that they plan to merge to create a company that they forecast will have the world's third-largest lithium production capacity by 2027. The all-stock deal is expected to close by the end of 2023.

Investors liked the news, with shares of Allkem up 19.7% and those of Livent 5.9% higher in the four trading days following the announcement, a period in which the S&P 500 index edged down 0.04%. 

Merger and acquisition activity has been heating up in the lithium space. Companies are keen to ramp up their production to meet the soaring demand for the compounds that are used to make lithium-ion batteries for electric vehicles (EVs).

Here's what investors should know.

Image source: Livent and Allkem merger presentation. Forecast is for year 2027. ktpa LCE = kilo-tonnes per annum of lithium carbonate equivalent. In the U.S., metric ton (MT) of LCE is more frequently used for annual capacity. 1 kilo-tonne = 1,000 metric tons. So, the combined company's forecast 248 kilo-tonnes = 248,000 MT. 

1. New lithium company's name, stock ticker symbol, and stock exchange listing

The name of the new combined company wasn't disclosed. The same is true of its stock ticker symbol. We do know, however, that the new company's stock will have a primary listing on the New York Stock Exchange (NYSE) and maintain a foreign-exempt listing on the Australian Securities Exchange (ASX). 

2. Basic financial profile of the combined new company 

For context, the world's two largest lithium producers by quantity, Albemarle (ALB 7.74%) and Sociedad Quimica y Minera, or SQM (SQM 9.18%), are included in the below table. Neither U.S.-based Albemarle nor Chile's SQM is a pure play on lithium, as both chemical companies have non-lithium businesses.

Data sources: YCharts, Livent-Allkem merger press release, and Albemarle and SQM 2022 annual reports. *Market caps as of May 9, the day before the merger announcement. The combined Livent-Allkem company's market cap is based on the terms of the deal. **EBITDA = earnings before interest, taxes, depreciation, and amortization. ***SQM doesn't break out its adjusted EBITDA by segment.

For an analysis of Livent's latest financial results, you can read about its first-quarter 2023 report here. 

3. Benefits of the proposed merger

Livent and Allkem tout that their businesses are highly complementary and synergistic -- and I agree. 

Livent's strengths are its technical and commercial capabilities and long-standing customer relationships, while Allkem contributes a significant growth pipeline, which has been Livent's main weakness relative to other big lithium companies.

Strategic benefits of the combination include:

• Creates a company with one of the world's largest lithium deposit bases.
• Increased economies of scale stemming from Livent and Allkem having geographically adjacent assets in Argentina (lithium brine operations) and Canada (hard-rock lithium mines).
• Complementary expertise in brine operations (Livent has proficiency in direct lithium extraction (DLE), whereas Allkem uses conventional evaporation methods) and lithium carbonate and lithium hydroxide production. 

Financial benefits of the merger include:

• Operating synergies of approximately $125 million per year (pre-tax) and one-time capital savings of about $200 million, driven mainly by the asset proximity and co-development in Argentina and Canada. 
• Strong combined balance sheet (combined liquidity of $1.4 billion and limited indebtedness) and positive cash-flow generation.
• Expected to be immediately accretive to both companies' shareholders on a net asset value (NAV) per share basis.

5. Logistics of the proposed merger

• Existing Allkem shareholders will receive the right to one share of a new public holding company for each existing Allkem share held. 
• Livent shareholders will receive 2.406 NYSE-listed shares of the new company for each Livent share held.
• Following the deal, Allkem and Livent shareholders are expected to own about 56% and 44%, respectively, of the combined company.
• The merger is expected to close in late 2023.

6. Leadership and domicile of the new company

Peter Coleman, who's the Chairman of Allkem, will also chair the new company's board of directors. Livent CEO Paul Graves and CFO Gilberto Antoniazzi will maintain their respective roles at the new company.

The combined company will be incorporated in Jersey (a Channel Island off the coast of France), with its corporate headquarters in North America (exact location not specified) and its corporate residency in Ireland.

Livent is headquartered in Philadelphia and has significant processing operations in North Carolina, so there seems a good chance that the City of Brotherly Love or somewhere in The Tar Heel State could be frontrunners for the headquarters of the new company. Jersey and Ireland are easy to explain -- they're both known to be "corporate-friendly" from corporate tax and other financial standpoints. 

A stock that will be worth following

In short, this proposed merger seems that it will benefit shareholders of both Livent and Allkem. The combined company's stock will be at least worth watching.