A takeover bid to create a single technology disrupter in the lithium space?
The soap opera that is the ongoing takeover bid between ASX listed Lithium Australia NL (ASX: LIT) (“Lithium Australia”) and Lepidico Ltd. (“Lepidico”) continues.
Earlier this month, we informed our readers that the litigation between Lithium Australia and Lepidico had now ended by mutual agreement. Those that followed the case know that Lithium Australia had accused Lepidico of making false and misleading statements to the public in order to actively discredit the company’s position regarding its Sileach™ processing technology. Lithium Australia further asserted that the basis for making these statements was for the sole purpose of attempting to inflict commercial harm to Lithium Australia and stave off a potential takeover. Lawyers were involved on both sides, and when damages were settled, Lithium Australia moved in swiftly.
Aside from their differences, a case for a unified company is indeed compelling as it envisages a single technology disrupter in the lithium space, improved access to funding, and improved protection of intellectual property. Generally speaking, a stronger, more focused entity can emerge from two squabbling ones if the ensuing commotion is managed competently.
What investors need to be aware of is that although technology investments differ from mining investments, when the two are one and the same, it gets a little more complicated. While, theoretically, every mine could reach the production phase, when investing in technologies only a couple of solutions will emerge victorious; a problem is just a niche that a solution hasn’t yet occupied, and niches, by their nature, don’t hold much.
As such, the risk of failure with respect to investing in technologies is arguably higher than the risks involved in mining. Sometimes, a technology may even prove entirely viable, but due to the lack of adoption, or some arbitrary preference for a competitor’s product, the company may fail to get it off the ground at all. When considered from this perspective, the fact that Lithium Australia owns actual lithium properties which could benefit from their Sileach™ technology is a huge plus, and amounts to a clever vertical integration of their lithium product.
Typically, the technology that is first to market has the greatest penetration and presents the best economics; both yield and capex/opex will usually improve considerably. For this reason, having more than one technology in your portfolio spreads the investment risk, and following the court settlement, Lithium Australia launched their takeover bid for Lepidico seemingly with this in mind, shoring up around 18%* of Lepidico’s stock by way of pre-bid sale agreements.
On the subject of the Lithium Australia bid, CEO, Adrian Griffin confirmed that the rationale behind launching the takeover was to provide the respective companies with a larger capital base and liquidity, and give them the potential to fast-track both technologies as opposed to arguing over who gets what. This, I agree, is absolutely critical if one wants to increase the chances of success in commercialising a new technology – simply get on with it.
On the 14th of March, Lepidico’s share price close at $0.013, with 1.75bn shares outstanding, implying a market cap of $22.76m.
On the same day, Lithium Australia’s share price was $0.155, with 257.83m outstanding, implying a market cap of $39.96m.
According to the bid statement sent by Lithium Australia to shareholders on the 2nd of March, the deal contemplates a share swap of 1 LIT share for every 13.25 Lepidico shares.
This implies a deal value of around $20.46m, which represents a discount to the current market value of Lepidico.
While 18%* worth of pre-bid agreements is impressive, it would be surprising if Lithium Australia gets the 90% that is required to trigger a compulsory sale. I believe the thinking with respect to merging the companies is correct, but both companies need to consider carefully what the correct value is for this deal to go ahead. Should it do so, it represents a serious opportunity to get involved with Lithium Australia.
[Publisher’s Note*: The 18% was in reference to Friday, March 17, 2017 by Analyst, Lara Smith.]