By Brian Robins
Analysts have added their voices to BHP Billiton's opposition to a plan put forward late Monday by activist shareholder Elliott Advisors to dump the global miner's dual company structure as part of a series of moves which are intended to boosting shareholder returns.
In its rejection, BHP said the costs would outweigh any benefits.
Elliott said its plan would retain BHP's listings in London and Australia, but would scrap its dual-company structure in favour of a single headquarters and tax residency in Australia. Credit: David Mariuz
Analysts with both Citi and RBC were quick to pan the idea, although both thought the US petroleum assets in particular to be 'non-core'.
"The streamlining of BHP Billiton ownership structure to extract value from franking credits as well as a spin-out of the US onshore division are not novel ideas," RBC Capital's mining analyst Paul Hissey said.
"We do not necessarily see a collapsing of the [dual listed company] structure would unlock value as we think the only way to distribute franking is through dividends to the Australian shareholders or buyback which we think is currently available to [BHP] in the current format," Citi analysts Clarke Williams and Trent Allen told clients.
In a letter sent to BHP following private meetings with the miner, Elliott outlined the proposals in detail. The investor has pushed for action to lift investor returns at a number of companies such as Samsung Electronics, Akzo Nobel and SABMiller.
BHP's response prompted its London-listed stock to pare early gains of nearly 6 per cent . By 1500 GMT, it was 2.3 per cent higher.
"After reviewing the elements of Elliott's proposal, we have concluded that the costs and associated risks of Elliott's proposal would significantly outweigh any potential benefits," BHP said in a statement.
Elliott's plan would result in BHP remaining listed in both London and Australia, but would scrap its dual-company structure in favour of a single headquarters and tax residency in Australia.
The activist investor called for BHP to shift its US petroleum assets into an entity to be listed on the New York Stock Exchange and commit to returning excess cash to shareholders.
The Citi analysts described BHP's US petroleum assets as 'non-core' with RBC agreeing the merits of BHP retaining its US petroleum sector assets as 'uncertain'.
"We value the US petroleum business at $US13.5b ($18b) vs. Elliott's $US22b valuation (although we do agree with the sentiment around the cumbersome nature of both the DLC and the uncertain benefits from petroleum diversification, especially regarding the mismatched pro-cyclical capital spend of the shale business)," RBC's Hissey told clients.
In outlining its proposal, Elliott argued BHP has underperformed comparable mineral and petroleum companies and its plan could provide shareholders with an increase in value of up to 48.6 per cent for holders of Australian shares and 51 per cent for holders of UK shares.
BHP disagreed, however.
"There is no obvious discount in BHP Billiton's trading multiples relative to the weighted average of relevant mining and oil and gas peers," it said.
The miner also said it regularly reassessed how to create value and reviewed company structure. It had spoken with Elliott over many months and would consider a more detailed response, it added. It dismissed Elliott's plan for buying back shares as "a formulaic approach without regard for the cyclical nature of the resources industry or the returns available from other uses of cash".
Commodity prices crashed in 2015 and early 2016, but have since recovered strongly, helping to drive gains across the mining sector.
Mixed views
Started in 1977, Elliott manages assets worth more than $US32.7 billion, according to the company.
It says it holds a "long economic interest" of about 4.1 per cent of the issued shares in London-listed BHP, without specifying the instruments used to build the stake. It also says it has rights with its affiliates to acquire up to 0.4 per cent of the issued shares in ASX
-listed BHP.
Other big shareholders were cautious about Elliott's plan.
"(The) principle is OK. Detail and resultant uplift to shareholders might be more complex/less obvious," Aberdeen Asset Management's Head of Equities Hugh Young said in emailed comments.
Aberdeen is the second-biggest investor in BHP's London-listed shares, with a 4.9 per cent stake worth $US1.3 billion.
Representing another big shareholder, Standard Life Investments Director Frances Hudson said it was not clear the plan was "in the interest of long-term investors or the company".
Over the past two years, BHP has underperformed relative to fellow miners Rio Tinto , Glencore and Anglo American. But over 15 years, it is ahead of them.
Since it was set up in 2001, BHP said it had returned approximately $US23 billion to shareholders in buybacks and about $US45 billion in cash dividends.
It said it had also taken many steps to increase shareholder value, cut the number of assets in its portfolio by $US7 billion since 2013 and cutting unit costs by more than 40 per cent .
"We have laid the foundations for the group to substantially grow the base value of its operations," BHP said in its statement. "Elliott's proposal would put this at risk."
- with Reuters