BHP Billiton plans detailed response to Elliott Management restructure plan
BHP plans a detailed rebuttal of proposals by an activist investor to spin off its petroleum assets and axe its dual-list structure.
BHP Billiton is planning a detailed rebuttal of radical plans by an activist investor to spin off its US petroleum assets and ditch its dual-listed structure.
BHP has already rejected the plan by the major hedge fund of US billionaire Paul Singer, Elliott Management, saying in a statement last night that the costs and risks would outweigh any benefits.
But the mining giant (BHP) plans a more detailed response and is working through its arguments before a presentation, likely tomorrow, by chief executive Andrew Mackenzie and/or chief financial officer Peter Beaven.
Mr Singer’s Elliott Management yesterday went public with its proposal, which would split BHP’s asset base in two and return it to being a fully Australian-headquartered company.
Elliott argues the measures could increase the value of BHP’s stock by about 50 per cent, or more than $US40 billion ($53.4bn).
The plan, if adopted, would represent the most dramatic overhaul in the storied company’s history since its 2001 takeover of Billiton created the current dual-listed structure split between Australia and Britain.
News of the plan drove a sharp surge in BHP’s shares yesterday and in London overnight.
Elliott, which manages nearly $US33 billion, is known as an aggressive activist investor that doesn’t shy away from targeting big companies in places where others have been hesitant to wade into local politics.
BHP is taking the plans seriously and, as it has already engaged in recent months with Elliott, none of the ideas are new.
The idea of this week’s rebuttal would be an attempt to kill the arguments before Elliott manages to attract significant new help for the proposals.
The issue which has most chance of success is the spin-off of BHP’s US petroleum assets which, while rejected by BHP, is conceded as an arguable case.
But BHP will question its value in light of issues such as what would happen to the remaining Australian assets, and argue the current structure adds value to the entire company.
BHP understands the collapse of the dual-listed structure would require the approval of the Foreign Investment Review Board. There are doubts the FIRB would sanction a primary listing for the company in London.
The secondary listing in Austtralia would soon be illiquid on BHP’s reckoning.
The formula-driven buybacks suggested are regarded as not suitable for a cylical resources company. The tax cost of the move would be over $2 billion on BHP figures.
BHP will argue it is constantly testing its portfolio for value and in the last decade has bought back $23 billion worth of shares and divested $7 billion worth of assets.
Elliott released its proposals yesterday after failing to convince BHP in private meetings with the company. Its aim is to build shareholder momentum to support the proposals which it argues boost shareholder value.
But BHP was last night digging in. “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.
It called Elliott’s share-buyback plan “a formulaic approach without regard for the cyclical nature of the resources industry or the returns available from other uses of cash.”
In a letter sent to BHP’s board, Elliott said the company had lagged its peers in recent years and was “failing to deliver optimal value” for its shareholders.
“Despite being a leading global resources company with a portfolio of best-in-class large-scale diversified mining assets, in recent years BHP as an investment has underperformed a portfolio of comparable mineral and petroleum companies,” Elliott said in the letter.
The group described last year’s spin-off of BHP’s non-core mining assets into South32 as an “important first step” in reforming its structure, but said the giant needed to go further and split out its US petroleum business.
New York-based Elliott said the US oil and gas assets would be worth about $US22bn as a stand-alone US-listed entity, with a spin-off to unlock value currently obscured by its bundling with the miner’s other assets.
Scrapping the dual-listed structure, Elliott says, would allow BHP to make more efficient use of the $US9.7bn in franking credits currently sitting on its balance sheet and available only to Australian shareholders. The inability of BHP to pass on those franking credits to those owning its London-listed shares meant the company had effectively wasted about $US853 million worth of franking credits last year.
While spinning off the petroleum assets and ditching the dual-listed structure have previously been touted by numerous commentators and analysts over the years, Elliot’s campaign stands out due to the scale and track record of the fund, the amount of work behind its plan and its recent direct engagement with the upper reaches of BHP management.
Elliott is understood to have held shares in BHP for more than a year, and has been in detailed discussions with BHP managers and executives right up to the very top of the company.
Backing a spin-off of the petroleum business would represent a sharp change in direction for BHP and chief executive Andrew Mackenzie, who last year told The Australian that holding both the minerals and petroleum arms was “hugely value-adding” and the two units belonged together “for the foreseeable future”.
“BHP Billiton’s approach is to optimise the long-term value of the Petroleum business through operating excellence,” BHP said last night.
While BHP said its dual-listed structure was under review, people familiar with the matter said the move would hurt Australian investors in favour those who hold London-listed shares, sparking a political fight in Australia, where BHP is among the largest companies. The company believes Elliott doesn’t understand the costs of certain tax issues involved in its proposal, the people said.
Mr Mackenzie has previously said that spinning off petroleum would lead to higher borrowing costs.
Meanwhile, Elliott’s modelling points to an increase of up to $US9 a share to unwind BHP’s Australian and London stock under its plan — which translates to more than $US40bn in value — the fund is likely to argue that the long-term benefits far outweigh any short-term impact. Elliott, whose founder and CEO Paul Singer is worth an estimated $US2.2bn, is one of the most prominent and oldest hedge funds in the US. It developed a reputation as a “vulture fund” through its buying up of distressed debt, famously profiting through its trade in defaulted sovereign debt from Argentina.
BHP has long owned a petroleum arm but substantially beefed up the division when it paid just under $US20bn on US shale gas acquisitions in 2011 at what proved to be the top of the market.
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