The Wesfarmers Ltd (ASX: WES) share price could react strongly to the news it aims to acquire Lynas Corporation Ltd (ASX: LYC).

Wesfarmers is a 100 year-old conglomerate which at various times has owned and operated some of Australia’s largest retail brands such as Kmart, Target and more. Today, its largest business is Bunnings Warehouse, the number-one DIY home improvement business.

Wesfarmers’ Large Takeover Plans

Wesfarmers is largely a retail business these days, but it wants to diversify its earnings by acquiring Lynas, a rare earths miner. Those rare earths are used in electronics, automotive, environmental protection and petrochemical sectors.

The Wesfarmers bid is a conditional, non-binding indicative all-cash proposal for $2.25 per share. This offer is a 44.7% premium to the last closing price and a 36.4% premium to the 60-day weighted average price of Lynas.

So, it’s a fairly hefty price that Wesfarmers is paying for Lynas, although some would say this is an opportunistic bid considering Lynas is/was close to its 52-week low.

Why Would Wesfarmers Make Such A Large Offer?

The company believes it is uniquely placed to grow the Lynas business with its large balance sheet and has a track record of working with Governments and stakeholders to produce positive outcomes for local communities.

Wesfarmers Managing Director Rob Scott may have said it best:

An investment in Lynas leverages our unique assets and capabilities, including chemical processing, and will deliver Lynas’ shareholders with an attractive premium and certain cash return.”

Some Lynas employees may be worrying about job cuts, as that’s a regular part of takeovers. However Mr Scott said that he expects Lynas employees will continue to play an important role.

Should Wesfarmers Shareholders Be Excited?

This deal is priced at around $1.5 billion if it goes through, so it would be a large part of Wesfarmers’ balance sheet flexibility being used. The company has divested a number of assets recently including Coles Group Limited (ASX: COL), Kmart Tyre and Auto, its stake in Bengalla and others.

If the deal goes ahead then Wesfarmers will have increased its earnings diversification whilst creating ‘synergies’ with its current businesses.

According to Lynas, rare earths have a positive future: “Industry analysts expect demand in key end use markets to grow well ahead of global GDP per annum, creating strong demand for rare earth materials.” This could mean Wesfarmers is buying a very useful acquisition.

However, the deal has a long way to go and there are a number of conditions which need to be checked off including due diligence, regulatory approvals and ensuring operating licences remain in force.

I prefer to invest in businesses that are non-cyclical and usually non-commodity companies.

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Disclaimer: Any information contained in this article is limited to general financial/investment advice only. The information has not taken into account your specific needs, goals or objectives, so please consider consulting a licenced and trusted adviser before acting on the information. Please read The Rask Group’s Financial Services Guide (FSG) for more information. This article is authorised by Owen Raszkiewicz of The Rask Group, which is a corporate authorised representative No. 1264179 of Strawman Pty Ltd (ACN: 610 908 211) (AFSL: 501 223).