Elliott makes it personal as BHP stands its ground

As BHP boss ­Andrew Mackenzie was preparing an ­annual update, Elliott Management stepped up its revamp call.

BHP CEO Andrew Mackenzie.

As BHP chief executive Andrew Mackenzie was preparing to deliver what is becoming one of the big miner’s most ­important annual updates, and a response to vulture fund Elliott Management’s call for a restructuring, the stalker made a dramatic shift in both the substance and tone of its campaign.

At 1.50am in Barcelona last Tuesday — and with Mackenzie set to speak to the Bank of America Merrill Lynch mining conference at 9am and meet with Elliott the next day — the New York fund issued a seven-page letter and 39-page investor briefing that made the attack personal.

But while Elliott has described BHP as a tax-avoiding chronic ­underperformer and accused man­agement of misleading shareholders, it watered down its proposal. A rigid buyback prescrip­tion has been dropped, calls for a US petroleum spin-off have been widened to consider differing proposals for the whole petroleum business and a call for a London incorporation has been switched to being an Australian one.

At the same time, the attack ­appears to be shaping a more flexible BHP view to its shale business, or at least speed up the transition.

Mackenzie admitted in Barcelona that shale was not a long-term part of BHP and the plan was to do whatever the company could to maximise its remaining value.

This week’s surprise Elliott strike came less than two weeks after departing BHP chairman Jac Nasser quietly fronted retail ­investors to speak out for the first time against the Elliott campaign.

Nasser, who is expected to ­retire before BHP’s October ­annual meeting in Melbourne, ­defended the company’s move into $US20 billion of US shale ­acquisitions in 2011, which he oversaw and which has been the focal point of Elliott’s claims of value destruction.

“We made the purchase at the wrong time, there’s no question that the timing was bad, but I’d have to say to you these were high-quality assets,” Nasser told the investors in a briefing on May 4, which coincidentally was the same day Scott Morrison said he would not approve ­Elliott’s call to replace BHP’s dual-listing with a London incorporation.

Nasser pointed to shale’s ability to rapidly be turned on and off as prices rise and fall. “We will only invest in production if it makes sense for us. If it doesn’t make sense, these assets are high-quality assets and we’ll have other means of waiting until it becomes a good asset, getting more productive all the time,” he said, ­according to a transcript ­obtained by The Weekend Australian.

He also rejected Elliott’s claims of BHP’s “chronic underperformance” by expanding the eight-year period in which the hedge fund says the company has delivered substantially fewer ­returns than Rio Tinto.

By starting the comparison in November 2008, Elliott captures Rio at its lowest point, during the global financial crisis when it was crippled by $US40bn of debt, mostly taken on to buy Alcan.

“If you invested with the company over the long period, the ­returns in the last 15 years have been 300 per cent and that is a good return in any language,” Nasser said. According to Bloomberg, this compares with 224 per cent for Rio, 233 per cent for the ASX 200 and represents a compound annual growth rate of 9.7 per cent. Elliott says BHP has under­performed Rio if the starting point is any year since 2008.

In Barcelona, Mackenzie met with Elliott investment manager James Smith, who has been driving the campaign, as part of a ­series of investor briefs.

The meeting, which Elliott ­described as “constructive”, is said not to have led to any further concessions on either side — with BHP rejecting Elliott’s call to dissolve the dual-listing with an Australian domicile — but has not resulted in more acrimony.

It is understood that BHP’s ­announcement this week that it was looking at a $US4.7bn development of the Jansen potash project in Saskatchewan was discussed.

Morrison’s unequivocal May 4 release, declaring Elliott’s plan for a London listing would not be ­approved, has led to a new Elliott proposal for a primary Australian listing and Australian headquarters. BHP is understood to have discussed this proposal, as well as the original one, with ­Elliott as part of wideranging discussions before the $US33bn hedge fund’s first public call for restructuring, on April 10.

BHP claims grouping the London shares (in which Elliott says it has a $US1bn stake) and Australian shares under a London listing would cost $US1.1bn.

It believes that doing the same thing under an Australian listing would cost more than $US1bn.

In its Tuesday update, Elliott said BHP had “misled” shareholders on the cost of unification by counting London tax losses that may not be realised and profit of its Singapore marketing hub, which Elliott said “seeks to avoid tax” and is unsustainable.

Elliott’s push to unify the structure would resonate more if it held a large stake in Australian shares.

Its position in London shares, which trade at a discount to the Australian shares, would be ­expected to perform better than the Australian shares if the structure was unified. This leaves it open to doubts its interests lie with that of Australian shareholders.

Elliott attributes BHP’s underperformance to Rio in recent years as being almost wholly because of the US shale acquisitions, and its plans to try to get more value out of the assets have resonated strongly with shareholders.

After talks with investors, and perhaps accepting BHP’s statement that the previously proposed US spin-off may not be appealing to Australian shareholders, Elliott now says it wants an independent review of the whole petroleum business to consider all options, including an Australian oil and gas spin-off.

In Barcelona, Mackenzie gave his most honest view to date that the US shale business was not one BHP wanted to expand, opening the door to widespread shale sales by saying that if someone wanted the assets at the right price he was prepared to talk. There was unlikely to be a natural buyer for all of the disparate assets, meaning a demerger may also be hard.

Smaller trade sales were likely to attract more interest, he said.

It is hard to find a disapproving investor voice, in public or private, to Elliott’s quest to get more value from the petroleum unit, but it has not all been one-way traffic.

Australian Foundation Investment Company, one of BHP’s top 10 holders of Australian shares, said an asset sale may not be the best action.

“So far I think (BHP) make a convincing case to let them extract value as they have in other parts of the business,” AFIC managing director Ross Barker told Reuters. “To shorten that by going straight to the market now wouldn’t necessarily be obviously the best course unless there was clearly a buyer that wanted to pay a lot more than the value that BHP think they can extract.”

It is still not obvious what ­Elliott’s end game is, apart from raising the value of BHP shares.

Theories range from drumming up publicity for investors (the company raised $US5bn this month), forcing a US spin-off that it would be in a good position to take a stake in or making an arbitrage profit on its London shares if traction is gained on its dual-listing proposal.

Whatever it is, the campaign looks like it will be long, become increasingly personal for management and directors and be focused on the October AGM.