BHP finally rules off its costly Billiton adventure

BHP’s blockbuster announcements along with its blockbuster profit marked the final coda in a disastrously costly merger.

BHP’s chairman, the energetic Ken MacKenzie. Picture: BHP

BHP’s blockbuster announcements along with its blockbuster profit didn’t just take Australia’s biggest and most globally significant company out of oil and gas and commit it to a future almost entirely and indeed literally “made in China”, it also marked the final coda in its disastrously costly merger with Billiton.

It also did so with a final kick in the teeth for shareholders in the Australian BHP, the “Ltd” listed on the local ASX, with a further transfer of value from them to those in the British BHP, the “PLC” listed on the London Stock Exchange – albeit dwarfed by the original value transfer from the actual 2001 Billiton merger.

The “big – new – news” was of course BHP’s proposed merger of its oil and gas assets with Woodside.

There was also the long-awaited, final, really final, green light to potash.

And, oh yes, almost as an afterthought, the decision to end the dual-listing; to bury PLC and give all those holders shares, on a one-for-one basis, in a once again single, unified BHP Ltd.

It was of course, and for anyone who knows BHP’s chairman, the energetic Ken MacKenzie, very definitely no afterthought, but structurally seminal – undoing something that was at best a clunky attempted optimisation of a reality that no longer existed.

The announcements, including the bottom-line profit of just shy of $16bn – a little less than “two Commonwealth Banks” – was made after trading closed in Australia on Tuesday evening and ahead of its opening in London.

When London opened, PLC shares promptly leapt 9 per cent. On Wednesday down under, in contrast, Ltd shares dropped 7 per cent.

The value of PLC shares went up $8bn, that of Ltd shares down $10bn. Thank you very much, from London to Melbourne.

The reason was simple. PLC shares have almost always traded at a discount to Ltd shares, because (Australian) shareholders in Ltd get franking credits on dividends (and on capital returns) and no shareholder in PLC does.

But now a PLC share will be worth an Ltd share because it will be a Ltd share, as they swap on a one-for-one basis.

Despite this value transfer, I would endorse the move.

At some point BHP had to grit its teeth, cop the value transfer and the tax and transaction costs and make the move.

The only reason for the dual listing was the 2001 merger with Billiton – just as BHP’s great rival and peer Rio Tinto also only has a similar dual listing because of the parent (then-named) RTZ’s full takeover of its formerly majority-owned Australian CRA subsidiary.

In BHP’s case, not only had all the functional reasons for a dual listing long since gone, but indeed and quite astonishingly the very existence of any of Billiton in the BHP of today.

Over the 20 years BHP has successively sloughed off the, frankly, rubbish it bought with Billiton; then ditched the Billiton name; and now finally the no-longer necessary dual listing.

But it could never “ditch” the value it transferred to the very and always thankful Billiton shareholders.

Under the 2001 merger terms, Billiton holders emerged with 42 per cent of the enlarged BHP Billiton.

They brought nothing like that in terms of earnings even at the time; and only assets which were at best second rate and over the two decades have all gone.

Billiton also brought to the old BHP which had, true, floundered its way through the last decade of the 20th century, what was supposed to be dynamic management.

This started at the very top with a new CEO for the merged group, Brian Gilbertson, who had a different perception of the roles of CEO and chairman to the perception of those roles held by BHP’s then chairman, Don “Don’t Argue” Argus.

Gilbertson did argue – and promptly “departed”.

BHP also “bought” in with Billiton another, younger and equally dynamic South African, Marius Kloppers, who in due course became CEO and became also the CEO who took – as it was then still named – BHP Billiton into US shale.

It was left to his successor, Andrew Mackenzie, to complete the extraction of BHP from that disastrous play and round off the losses at – oh I don’t know? – around $30bn, give or take a billion or five.

Hmm. The BHP of 2001 handed 42 per cent of its equity to Billiton shareholders in return for, well, four fifths of five-eighths of copulating all, plus a shiny subsequent new CEO who would then lose them $30bn.

And now to mark the final obliteration of anything Billiton, the BHP of 2021 has handed about $8bn to holders in the British listed vehicle.

By week’s end, Ltd’s shares finished down 15 per cent, knocking $22bn off the value of the Australian holdings.

PLC’s shares were also down over the week, but only by 6 per cent (ahead of Friday night’s trading).

While the arbitraging between the two listings on the unification move drove the relative moves, both were driven down together by a series of forces.

The reaction to the merger proposal, the profit, and the plunge in the iron ore price.

On Friday the iron ore price dropped to “just” $US130 a tonne. Barely three months ago it peaked around $US230.

If it stayed at that $US130 all through this half-year that alone would knock $5bn off BHP’s revenue and its EBITDA profit in the half relative to the just completed June half.

Just as the dual-listing move was the final coda to the Billiton saga, so the sudden plunge in the iron ore price provided a sobering entry to the future that BHP has embraced.

It is a future which makes it even more dependent on one commodity, iron ore, and one country, China.

In the year just completed, BHP got 57 per cent of its revenue and 70 per cent of its EBITDA profit from iron ore.

A further 23 per cent of profit came from copper and essentially one mine in one country, Chile.

Interesting.