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Extract AUST today: Wesfarmers talks to Malaysia over Lynas Wesfarmers has started direct discussions with Malaysian authorities over the regulatory impasse facing its $1.5 billion takeover target, rare earths producer Lynas. PIn a move that could complicate Lynas’s own negotiations with Malaysia, Wesfarmers has begun flagging with Malaysia the potential solutions it could bring to the table if it gained control of the group.
Lynas, which on Tuesday received an unsolicited and conditional $2.25-a-share offer from Wesfarmers, processes rare earths from its Mt Weld mine near Leonora in central Western Australia through its advanced material processing plant at Kuantan in Malaysia. The plant has attracted opposition from some environmental and community groups in the past, and Malaysian regulators late last year moved to modify the licence conditions governing the plant. Lynas’s auditors earlier this year warned that the company was at risk if it could not resolve the approvals impasse by September .
Wesfarmers is believed to be looking at whether it could relocate the processing facilities back to Australia, where it could be integrated into its existing chemicals business, and potentially return the contentious waste material at Kuantan to Australia. Wesfarmers has moved quickly to engage with Malaysian authorities after its proposal was made public, but the move has angered Lynas chief executive Amanda Lacaze.
“Wesfarmers have nothing to bring to the table in terms of the Malaysian operations and the discussion with the Malaysian government,” Ms Lacaze told The Australian. “They cannot speak on behalf of Lynas, they do not have the information that’s required to make those meetings meaningful, and we are not planning to engage with them. So I’m uncertain about what they can bring to the table.”
Ms Lacaze also noted that Wesfarmers — in which she also happens to be a shareholder — had little track record of operating businesses outside Australia. She said the political climate and culture in Malaysia was vastly different to that experienced by Wesfarmers in Australia. “It demonstrates a lack of understanding and a belief that a chequebook solves everything. That’s not the case,” she said.
Lynas yesterday formally advised it would not engage with Wesfarmers, and Ms Lacaze said Lynas’s shareholders had been “completely supportive” of the decision to rebuff the approach. The company’s largest shareholder, Melbourne-based fund manager Greencape Capital, yesterday publicly endorsed Lynas’s decision. Greencape portfolio manager Matthew Ryland told The Australian the Wesfarmers approach was opportunistic and undervalued Lynas.
He said he was not surprised Wesfarmers had pounced, given the strategic value of Lynas and the fall in the company’s shares since the latest regulatory uncertainty surfaced. “They would have seen an attractively valued business that’s an amazing strategic provider, being the only supplier outside China, in what is a long duration demand story for a scarce product ,” Mr Ryland said. Greencape, which is partowned by Challenger, has lifted its stake in Lynas from 7.1 per cent to 9.3 between September and March when the stock was averaging around $1.79 a share. ........ The approach has also drawn a mixed response from analysts who cover Wesfarmers, which late last year ended its involvement in the mining industry after the sale of its last coal assets. Morgans analyst Alexander Lu downgraded Wesfarmers from “add” to “hold” on the back of the move, noting the political risk in Malaysia and the presence of radioactive thorium in the material mined and processed by Lynas. “Lynas has been dealing with environmental issues in Malaysia so we question whether this is the right move from an ethical perspective after exiting its coal assets,” Mr Lu said.
Citi analyst Bryan Raymond said Lynas would bring a higher degree of risk into the Wesfarmers portfolio and cap its ability to step up dividends. “While somewhat opportunistic timing given the challenges in Malaysia, this bid is a reminder that acquiring an asset is more difficult than divesting assets in this market,” Mr Raymond said. “We see the Lynas deal as a step up in the risk profile for Wesfarmers which also reduces the near term potential for further capital returns .”
Shares in Lynas crept closer to the Wesfarmers offer price yesterday , closing 1.9 per cent higher to $2.14, while Wesfarmers recovered 0.7 per cent to $34.04 after being sold down after the announcement of the approach on Tuesday.
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