Norman B. Keevil’s nightmare is becoming a reality.
On Wednesday, Teck Resources cancelled a proposal to split the company in half, a transformational move that would have created two Canadian mining champions. One would produce the metals needed for the energy revolution, while the other would dig up the type of coal used to make steel.
Teck TECK-B-T presumably withdrew the plan after learning it lacked the shareholder votes to put it into action. It is thought the company was unable to convince its biggest shareholder, China Investment Corp., with 10 per cent of the common class B shares, to reverse its “no” vote and endorse the split proposal.
The collapse of Teck’s attempted reinvention means Canada’s biggest diversified mining company will revert to the status quo; it also means Teck is now exposed to takeover attempts that could see it land in foreign hands.
Mr. Keevil, Teck’s chairman emeritus and son of company founder Norman Bell Keevil, is a proud Canadian nationalist who did not want to see his company owned – and probably hollowed out – by a gang of ruthless foreigners determined to compete with the Chinese in the global battle to lock up supplies of critical metals such as copper, nickel and cobalt.
Teck is in the gunsights of Glencore GLNCY, the Swiss commodities giant that typically doesn’t like to take “no” for an answer. Glencore has delivered two merger pitches to Teck since March, both of them enthusiastically rejected. Now that Teck’s grand plan to reinvent itself has crashed and burned, Glencore will certainly make a third attempt, this time at a higher price that Teck’s class B shareholders, who control most of the equity but few of the votes, may find irresistible. Mr. Keevil and ally Sumitomo of Japan, who own almost half the super-voting class A shares but only a tiny amount of the equity, may find themselves forced to bend to the will of the shareholder masses.
A timeline of the takeover bid Teck Resources is fighting against
How did Teck so thoroughly botch its proposal to split the company?
Teck has made big strategic errors in the past, like vastly overpaying for its coal division and attempting an expensive, and eccentric, foray into the oil sands, an industry it knew virtually nothing about. But the biggest recent mistake – the one at the root of its downfall – was the plan to spin off its hefty coal division.
The idea of the spin-off was not itself the issue – big diversified mining companies everywhere (except Glencore) are selling or spinning off their grubby coal divisions to pretty themselves up for investors who follow environmental, social and governance (ESG) principles. The problem was the way they wanted to do it.
Teck devised a spin-off that would have seen the new coal company, to be called Elk Valley Resources, retain financial ties to the old parent (which would be renamed Teck Metals). About 90 per cent of its cash flow would be paid to Teck Metals in the form of dividends and royalties for a number of years. In other words, Elk Valley would look more like a subsidiary than an independent company.
The first rule in corporate restructuring is to keep it simple, all the better not to confuse shareholders into thinking they are being gamed, and this spin-off was anything but simple. Indeed, shareholders and analysts were hardly enthusiastic about the plan.
Two other problems arose. The first was that Elk Valley would be starved for capital, leaving it a zombie company, since Teck Metals would soak up most of its cash flow. The second was the potential unreliability of those cash flows. What if Elk Valley changed ownership? The new owner would naturally attempt any legal route to shrink those payments: Sorry, Teck Metals, we had an unplanned severe cost overrun and need to conserve cash.
The spin-off turned into more of a liability than an asset. Sensing the shareholder unease, Glencore, the owner of the Viterra grain-handling business in Canada and the former Canadian nickel miner known as Falconbridge, pounced. It gambled that a “no” vote at the shareholder meeting would open the door to a merger with Teck and a related deal that would combine the two companies’ metallurgical and thermal coal operations.
Glencore’s hunch was bang on, though it is far from certain that it will result in the conquest of Teck.
Mr. Keevil’s voting shares give him the final say on who controls Teck, and it is an open secret that he has no love for Glencore. That became apparent when Teck, in rejecting Glencore’s merger offer earlier this month, listed more than US$1-billion in penalties paid by Glencore in 2022 alone to the U.S. Department of Justice and various other regulatory authorities to settle bribery and market manipulation probes. That put Glencore on the warpath, no doubt giving Mr. Keevil even greater resolve to send Glencore packing.
But, at the same time, Mr. Keevil has said he would not use his extraordinary voting power to block a deal endorsed by the Teck board and the class B shareholders. He told The Globe and Mail last week that “the A shares can’t go against what the majority of what the B shares want to do.”
Glencore will exploit Mr. Keevil’s statement to the hilt. Watch the company bump up its opening US$23-billion offer within days as it courts the class B shareholders. Rival bids from global mining companies may knock Glencore out of the picture – or maybe not. And Teck may attempt a “simpler, more direct separation,” as Teck chief executive Jonathan Price put it Wednesday, to try to keep its breakup plan intact.
So far, Glencore, to Mr. Keevil’s regret, has played its hand well. But this game is not over yet – far from it.
Eric Reguly