BHP Billiton pressured on oil spin-off by Elliott Management

BHP has rejected a radical plan to split its asset base in two and again make it a fully Australian-headquartered firm.

Elliott is understood to have held shares in BHP for more than a year.

Mining giant BHP Billiton would split its asset base in two and return to being a fully Australian-headquartered company under a radical plan put forward by the major hedge fund of US billionaire Paul Singer.

But BHP has rejected the plan, saying the costs and risks would outweigh any benefits.

Mr Singer’s Elliott Management yesterday went public with its proposal for BHP to spin off its petroleum assets and ditch its dual-listed structure, with the group arguing that 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, with the stock jumping more than 4.6 per cent in a move that vastly outpaced those of its peers. The move was even more pronounced in BHP’s London-listed shares, which were up more than 5 per cent on opening last night before closing up 2.2 per cent.

That gain added almost $3.7bn to the value of the Australian shares of BHP, which is the second-biggest company on the ASX by market cap and which is one of the most widely held stocks in the country.

The BHP surge powered the broader stockmarket to a two-year high, with the benchmark S & P/ASX 200 index jumping in the final minutes of trade, closing up 50.4 points, or 0.86 per cent, at 5912.9 — its highest close since April 2015.

Last night BHP was 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.

In the 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.

The move on BHP by Elliott — which has an estimated $US32.7bn in assets under management — is the latest, highest-profile and most material move by a US activist fund on an Australian stock to date. It comes just weeks after US-based activist short-seller Glaucus Research launched a vicious attack on sandalwood company Quintis, levelling damaging allegations against its business model and triggering a significant selldown of the company’s shares.

Unlike the move by Glaucus, which holds a short position in Quintis and is aiming to hurt the company’s share price, Elliott owns about 4.1 per cent of BHP’s London-listed shares and wants to see the value of the stock increase.

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.

BHP 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.”

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.

With Dow Jones