Glencore PLC (LSE:GLEN) remains good value despite its planned merger with Teck being unlikely to succeed.
The was the conclusion of Jefferies which has been assessing the likelihood of its move for Teck succeeding along with the FTSE 100-listed company's options should it not.
The broker puts the probability of success in Glencore’s plans to merge with Teck at less than 50%. It highlighted a number of reasons:
1) the additional premium that Glencore can economically justify is small (Jefferies expects a 10% bump as a final offer);
2) Teck's management has made a strong (but debatable) argument against the strategic and economic benefits of this merger;
3) Teck's controlling Class A shareholders may reject an offer from Glencore at any price;
4) valuation for the combined de-merged, large listed coal company would be an issue due to ESG factors and concerns about thermal coal fundamentals;
and 5) regulatory approvals will be difficult.
Nonetheless, the broker thinks Glencore's management move to merge with Teck and then de-merge the combined company's coal business as a separate listed entity has effectively "let the cat out of the bag".
At this point, Jefferies believes a coal spin for Glencore becomes probable, with or without Teck.
The broker estimates a coal spin could unlock trapped value from the Glencore structure while it also thinks the firm will also continue to hunt for M&A opportunities as there is a compelling argument to buy rather than build.
Jefferies doesn’t see Glencore a bid target itself.
“While we cannot rule it out entirely, we believe it is highly unlikely that Glencore becomes a target for BHP or any other miner."
"However we do see value in Glencore as a standalone” analysts at the broker wrote.
Jefferies has a buy rating and 650p per share price target for Glencore with shares trading up 2.3% at 467.75p each in London on Tuesday.