Shares of Teck Resources TECK-B-T are on fire, and that is a sure sign that hedge funds and other arbitrageurs are building stakes in what could be an epic battle for control of the last Canadian diversified mining company of any size. If their stakes are big enough, they could influence – even determine – Teck’s future ownership.
Teck shares have rallied about $10 since the start of April, taking them to $65 and giving the company a heady market value of almost $34-billion. While no hedgie has declared it is playing the Teck game, the steady price increases and trading volumes of as much as seven million shares a day suggest they are.
We can guess who they might be. Among the usual suspects are Carl Icahn – at 87, he still enjoys a good takeover fight – and John Paulson, who made billions betting against the U.S. subprime mortgage market during the 2007-08 financial crisis. Some of them are infamous for launching campaigns against corporate boards, as Mr. Icahn is. There may be many smaller players, all hoping for an easy kill, even if they are aware that their bets could go against them.
Hedgies are often attracted to complex, messy situations – and Teck certainly qualifies on that front.
On April 26, Teck shareholders are to vote on the company’s plan to split itself into two parts, one holding base metals such as copper and zinc, the other coal used for making steel. It is unlikely that many hedgies will be able to vote on that proposal for the simple reason that it is restricted to the Class A and B shareholders who registered by March 7, shortly before Teck’s machinations captured the attention of the quick-buck artists.
This is not to say that they cannot load up on the widely held B shares now to play both the outcome of the vote – yea or nay – and the next move by Glencore GLNCY, the Swiss commodities giant that last month offered to merge with Teck in an all-share deal pitched at a 20-per-cent premium. The Teck board and the man who controls the super-voting A shares, Norman B. Keevil, rejected the offer outright and later gave the thumbs down to a revised bid that gave Teck investors the option of taking cash instead of shares in the spun-off coal company.
Glencore covets Teck, and there is some chance it will bump up its offer between now and the vote in an effort to derail the Canadian company’s demerger proposal. If Glencore were to add 10 per cent, its 20-per-cent premium would rise to 30 per cent, which may be enough to convince the B shareholders, who own almost all the equity but few of the votes, to come out against the split. (Teck needs two-thirds of both the A and B shares to win the vote.)
Then what? Suppose the vote does go against Teck. Presumably, Glencore’s merger offer, or an improved version thereof, would remain in place. At that point, the hedgies might load up on Teck shares to the point that they own 10 per cent or 20 per cent of the company, enough for them to have some say in its future. They might take legal action if the Teck board were to continue to reject Glencore’s offer or any other lunge for the company.
They can be a litigious crowd. Mr. Icahn employs legal teams to rough up boards of directors. In one of his recent clashes, he reportedly made US$1-billion by opposing Occidental Petroleum’s purchase of Anadarko Petroleum, which he criticized as outrageously expensive. He built a 10-per-cent stake in Occidental and managed to place two of his appointees on its board. A settlement between the two warring parties helped lift the shares, and Mr. Icahn locked in a hefty profit.
In this sense, the hedgies could emerge as an ally of Glencore by threatening to sue the Teck board for breach of fiduciary duty for failing to entertain Glencore’s offer or any other offer that emerges. Remember, Mr. Keevil has said that he would not use his super-voting shares to block a deal endorsed by the board.
They could even come out on top if the vote goes in favour of Teck, since Mr. Keevil has said he is open to a postsplit deal that would enlarge the metals-focused company after the coal division is spun off. The Globe and Mail reported that three of the world’s biggest mining companies – Vale, Anglo American and Freeport-McMoRan – have approached Teck to discuss get-together scenarios. Other mining giants, such as BHP – whose chief executive, Mike Henry, is Canadian – may come knocking.
The big questions are whether they would make their move before the vote or after it and how they would get rid of Teck’s coal. None of the big mining companies, except Glencore, want the dirty fuel.
Of course, if a bidding war does not break out, Glencore drops its pursuit of Teck, the Canadian government rejects the company’s takeover or Mr. Keevil uses his super-voting shares to guard Teck’s independence for years, the shares would almost certainly sink, handing the hedgies a loss. But it appears that Glencore is determined to merge with Teck and that rival mining companies may enter the skirmish. The hedgies, whoever they are, think all the moving parts in this saga will solidify into a fat profit for them.
Eric Reguly