Why Malcolm Turnbull must intervene in Elliott’s campaign to overhaul BHP Billiton

THE Prime Minister must declare that US activist investor Elliott will never get approval to steal BHP Billiton away to London, says Terry McCrann.

THE Prime Minister must publicly state that under no circumstances will approval be given to mainchancing US activist investor Elliott to steal BHP Billiton, and ownership and control of its nationally vital mines and commodity operations away to London.

It should be blindingly obvious that it is fundamentally in the national interest that BHPB remains “Australia’s BHPB”; that BHPB remains the “Big Australian” — to use its two most resonant 20th century tags.

It would be more than useful if the PM were to go very simply, but very clearly and forcefully, on the public record in that regard. It would also be useful as a demonstration that he actually understood as much.

In the 1980s, that old BHP embraced an Elliott — John Elliott — to save it from the wicked “foreigner” (as in, emerging from Perth, across the Nullarbor) in the late Robert Holmes a Court.

Holmes a Court was promising to “unlock value” that a lazy or incompetent board and management were unable or unwilling to do.

After Elliott J launched his own “friendly” raid on BHP, it “ended”, initially, with stalemate on the BHP share register; and the rest — an awful, awful lot of “rest” — would be history.

Again, we have a “wicked foreigner” proposing to “unlock value” that a BHPB board had — purportedly — failed to do. This time it is the “wicked foreigner” which is named Elliott, albeit with the same two L’s and two Ts.

This time though, it is a very different BHPB; and, self-evidently, it is not embracing this Elliott — US hedge fund Elliott Management, controlled not by someone of that name, but billionaire Paul Singer.

This Elliott/ Singer is proposing some fancy financial engineering. That is ALL it is proposing — that it can sprinkle some financial fairy dust over the BHPB share price.

Apart from one thing, itself also really more financial engineering fairy dust than real operational change — floating off BHPB’s US petroleum business into a separate, and US, company — it is offering absolutely zero in terms of making BHPB work better operationally.

This is, a) because it can’t; and b) because it is all and only about sprinkling fairy dust to — very, very, dubiously — purport to make two and two add up to five. At least for a while, while the fairy dust “works”.

At core what Elliott is proposing is to make a “new BHPB” attractive to especially British, but more generally, northern-hemisphere, investors.

This would inevitably, and probably quite quickly, lead to the major ownership of BHPB shifting from Australia — via a combination of retail and institutional investors — to British and other northern-hemisphere investors.

This would mean management control of, and investor ownership of, Australia’s one and only globally significant national asset — the world’s biggest and best non-oil resources group — being lost. With all sorts of other negative flow-ons in the long term.

The Elliott proposal has a certain surface glossiness. But it is ultimately fundamentally incoherent. It would almost inevitably end up destroying both BHPB as an integrated group and the value inherent in the mines it has developed.

The experience with its major competitor, Rio Tinto, should be an instructive guide; both as to what Elliott is proposing and why it has targeted BHPB.

In essence the London-based Rio was permitted by the federal government to fully take over its previously partially owned, but legally separate, Australian operations on the promise that management control would remain in Australia.

THAT promise evaporated in the reality of voting power and financial interest. All operational and overall control migrated to London.

Do we seriously want the same to happen to BHPB? Do we seriously want to end up with all our major resources operations owned, controlled and managed out of London? The resources operations, which are the core of our single most important 21st century economic relationship, with China?

Further, in essence Elliott is proposing to take billions of dollars of value from the Australian BHPB legal vehicle — BHP Ltd — and shift it to its British twin, BHP PLC. That’s both current value and future value (to the extent it’s not destroyed).

BHPB’s dual-listed structure is clunky. But given Australia’s unique “franked dividend system” it actually works very well — enabling franked dividends to be streamed entirely to Australian investors, either in dividends or through off-market share buybacks.

The Elliott proposal would direct those franking credits to ALL shareholders, Australian and foreign equally. Bluntly, that would waste them; and the waste would increase as the shareholding base shifted from Australia to London.

Although in a narrow sense that could be seen as a plus. Looked at in isolation it would be net positive for Australian tax revenues. Most of BHP’s franking credits would not be claimed. Except of course that’s a fantasy consequent on the Elliott fairy dust sprinkling. It purports to propose the “new BHPB” would remain an Australian company for tax purposes; that it would continue to pay Australia’s 30 per cent.

Who do they think they are kidding? Corporate tax rates are coming down all over the world — Britain is headed for a 17 per cent tax rate. And some of the “smartest guys in the financial engineering room” are proposing, cross their collective hearts and hope to die, with a 30 per cent tax regime?

They must think Malcolm Turnbull and Treasurer Scott Morrison — who would personally have to sign off on an BHPB shift, if it got past BHPB shareholders — came down in the last shower.

So it’s a good time for Turnbull to show he’s not that “wet”. And failing any leadership from him, perhaps Tony Abbott could add a sixth core point to his five-point proposal to wake-up the government.

Originally published as Why Malcolm Turnbull must intervene in Elliott’s campaign to overhaul BHP Billiton