Back in the spring, Teck Resources Ltd. suffered one of the biggest blows in its more than 100-year history. At the 11th hour, Canada’s biggest diversified mining company called off a restructuring that had been years in the making, after failing to garner enough support from shareholders.
On the day of that grim announcement, the atmosphere at Teck’s TECK-B-T annual general meeting was akin to that in a morgue. Teck’s sombre-faced chief executive officer Jonathan Price and its board of directors were forced to publicly accept blame for putting forward a poorly conceived restructuring.
Under the plan, Teck would have spun out its ESG-unfriendly steelmaking coal business to shareholders, but still retain significant exposure to it because the business would pay royalties to its remaining critical minerals division for about a decade – a confusing, and convoluted transaction that muddied Teck’s ESG credentials.
Another major factor in Teck losing the vote, however, was an aggressive takeover campaign from Swiss mining and commodities trading powerhouse Glencore PLC GLNCY. In the run-up to the meeting, it successfully convinced a significant number of Teck’s shareholders to vote against the proposed restructuring. Back then, Glencore was dangling an offer to buy all of Teck for US$23.1-billion, which was a significant premium to its stock market value.
During that period, not only did Teck reject Glencore’s advances, it painted the giant in pejoratives. Mr. Price accused Glencore of having shoddy ESG credentials and broadcast publicly the Swiss miner’s track record of bribery and market manipulation.
Glencore did its fair share of public bashing of Teck. CEO Gary Nagle called Teck’s proposed coal spin-out a “zombie company,” that would be a sitting duck for a foreign takeover.
With such bad blood between Teck and Glencore, it was hard to envisage an outcome would see Teck this week announce a plan to sell the majority of its coal business to Glencore in a transaction worth US$8.9-billion. Yet, over the course of the past six months, the former foes realized that they had little choice but to make nice.
With Teck dead set on cutting ties with its coal business, Glencore’s cash-heavy offer proved to be irresistible. Meanwhile, Glencore, renowned as one of the canniest negotiators in global mergers and acquisitions bided its time, played the long game, and its voluble CEO held his tongue.
On that gloomy rainy day in Vancouver at Teck’s AGM in late April, Mr. Price said the company was going to embark on another restructuring effort. The objective this time was to come back to shareholders with a cleaner transaction, one that would see Teck exit entirely from the coal business.
While Glencore at that point was ecstatic, it publicly kept its enthusiasm in check, merely issuing a statement saying that it still hoped to be able to reach a friendly agreement to buy Teck. Behind the scenes, negotiations between the two continued with Glencore still pushing for its proposed buyout of all of Teck.
Already one aspect of the dynamic between Teck and Glencore had shifted remarkably, however. Before Teck’s failed split vote attempt, Teck and Glencore both conducted themselves like trash-talking, chest-puffing heavyweights before a championship bout.
Overnight they turned into choir boys. A source familiar with the situation said that it was agreed that within Teck, Fight Club rules were now in effect. As star Brad Pitt famously said in the 1999 movie, “the first rule of Fight Club is you do not talk about Fight Club.” So, over the rest of the M&A auction process for Teck’s coal business, Teck executives said next to nothing publicly, other than saying the process was going well, and pejoratives of any kind against Glencore were verboten.
In the background, plenty was going on. As much as Glencore pushed to get Teck to consider a buyout of the entire company, Teck would not back down. Over time, Glencore realized that while not the ideal outcome, getting the coal alone was still a very good second prize. In a presentation to investors in May, Mr. Nagle gave the first indication that Glencore might settle for buying Teck’s coal assets. In June, the company acknowledged that in a formal statement.
Meantime, other bidders had emerged for Teck’s coal business. Pierre Lassonde, co-founder of Franco Nevada Corp. and a well-known Canadian nationalist, told The Globe and Mail that he was working on a syndicate that would see his group buy a percentage of the coal business, and the rest would be spun off to shareholders. Mr. Lassonde confirmed in an interview that his consortium included Fairfax Financial Holdings Ltd. founder Prem Watsa and Stelco Holdings Inc. CEO Alan Kestenbaum.
In August, another big hitter joined the fray. Indian steel conglomerate JSW Steel Ltd. said it was as willing to buy up to 40 per cent of Teck’s coal business.
Other smaller players also emerged though the process. Japan’s Nippon Steel Corp. NPSCY indicated it would be willing to buy 20 per cent of the coal business, and South Korean steelmaker POSCO PKX-N was good for 3 per cent.
By late summer, Teck had several serious bids in front of it, and was considering either a full sale of the coal business or a partial sale plus spin-out.
A source familiar with the situation said that Teck signalled to Glencore that Nippon and POSCO should be part of its proposal, and Glencore agreed to reduce the amount of the business it would acquire to 77 per cent.
In the final week before the deal was announced, Glencore and Mr. Lassonde each felt confident they would emerge as the winner, and both had good reason to feel that way.
Glencore’s bid was all cash, and it had also bumped up how much it was willing to pay from the outset by about 5 per cent.
But at the same time, Mr. Lassonde’s group felt that they had put together a very strong offer, that was a made-in-Canada solution that would keep Teck’s coal business in Canadian hands, and presented little or no risk of being rejected by Ottawa.
On Monday night, hours before the deal was announced to the public markets, Mr. Lassonde received a call from Norman B. Keevil, the 85-year old controlling shareholder of Teck. The two have known each other for decades and are close friends. Mr. Keevil broke the news to Mr. Lassonde that Teck had gone with the Glencore-led, all-cash deal and he tried to console Mr. Lassonde.
In an interview with The Globe, Mr. Lassonde said he was “disappointed” at the outcome and he viewed it as one that will further weaken Canada’s dwindling position as a mining player on the global stage.
“It’s déjà vu all over again,” he said. “I got involved in this whole situation, because I thought Canadians, Canadian investors, Canadian employees, Canadian taxpayers were getting the short shrift. And now we were going to lose another one of our great companies, like we’ve lost all the other ones.”
A source familiar with the transaction also said that Mr. Lassonde’s camp was surprised to that Teck did not give its consortium the chance to make a cash bid for 100 per cent of the coal business. Had Teck made it clear that a cash bid was its preference, the Lassonde camp may have tried to structure a transaction that way. The source added that the Lassonde camp feels it may have been used as what investors call a “stalking horse” bid in order to extract a higher price from Glencore.
But Mr. Keevil in an interview disputed that theory. While he says he wasn’t aware of the nuances of the back and forth of the deal, Mr. Lassonde, he said, was not treated any differently that any other bidder in the process and nobody was favoured.
“He could have made any kind of offer he wanted,” Mr. Keevil said.
The final sale price for Teck’s coal business was viewed by many analysts as about as close to a fair deal for both parties as you will find. The consensus is that Teck successfully wrung a higher valuation out of Glencore over time, but the Swiss miner did not overpay.
The major uncertainty from here on in is whether the deal will pass a net-benefit to Canada test and national security review by the federal government. While the early body language out of Ottawa so far appears promising for Glencore, the decision isn’t expected to come down until the third quarter of next year.
Mr. Lassonde, for one, says he doesn’t believe Glencore will honour various commitments made around preserving jobs, investing in the B.C. economy and honouring agreements with First Nations. But Mr. Keevil says he has “no reason not to believe Glencore.”
In about three years, after a standstill agreement with Teck expires, Glencore will have the opportunity to finish what it started, and buy the rest of the company. Through his supervoting A shares, Mr. Keevil would still have the power to veto such a deal.
Mr. Keevil told The Globe on Friday that his preference is to grow Teck organically.
“What I would be most okay with is we get the opportunity to do again what we did in my early years with the company, he said. “And that is take this company to another plateau by good, responsible, on-time, on-budget building of new mines. That’s how we made the company, and that’s the plan for the future, and hopefully that’s not messed up by someone.”
Now, after one of the most stressful and dramatic years in Teck’s long and storied history, Mr. Keevil says it will be “very relaxing” if Teck for the next couple of years can just focus on being a mining company.
“It’s time to get down to business.”