Vote Against Teck’s EVR Spinoff, but Vote for Removing Dual Share Class Structure

We suggest shareholders vote against no-moat Teck’s TECK proposed separation at the shareholder meeting on April 26. Teck proposes to demerge and spin off its metallurgical coal operations into a new company called Elk Valley Resources. While we acknowledge the environmental, social, and governance reasons behind the proposed separation, we think the proposed structure is complex and inferior to no-moat Glencore’s GLEN proposal to acquire Teck. However, we suggest shareholders vote for Teck’s proposed dual class amendment under which it will collapse its existing dual share class structure, as it removes a voting imbalance and restores control based on economic ownership.

We retain our fair value estimates for Teck and Glencore of USD 40 and GBX 560 per share, respectively. In our view Glencore’s proposal is simpler and offers a meaningful premium to Teck shareholders while allowing those Teck shareholders concerned about coal exposure to exit. Glencore’s proposal also offers a clean break in that it doesn’t result in EVR being exposed to material financial liabilities, namely significant cash flows and shareholder value transfer to the metals business, after the proposed separation.

We support Teck’s proposal to remove its dual share class structure, whereby Class A shareholders control around 61% of the votes despite an economic ownership of only around 1.5% of the business. The 67% premium being offered to Class A shareholders is generous. But on balance we think the resulting dilution of about 1% to Class B shareholders is a reasonable cost to remove the dual class structure and improve governance.