No hurry to unwind BHP Billiton dual-listing: UBS

BHP’s dual-listing is unlikely to be unwound any time soon, according to UBS analysts.

The BHP Billiton dual-listed company structure under attack from activist hedge fund Elliott management is unlikely to be unwound any time soon, according to UBS analysts, whose latest analysis shows little compelling reason to pursue unification.

The UBS report, led by senior mining analyst Glyn Lawcock, comes after BHP last month released more information on the value of keeping the dual-listed-company (DLC) structure, in response to Elliott-funded analysis that claimed dissolving the DLC under an Australian primary listing could reap $US22 billion ($28bn) worth of value.

“While we see a collapse likely at some point, we believe BHP might be better off focusing on its priorities of driving productivity, selling shale, restoring its balance sheet and rethinking potash,” UBS says in a note to clients.

“At the moment it seems the DLC is not a constraint or major cost centre to the business, and collapsing would result in bringing forward tax implications and franking credit burn, and may well result in Limited (Australian-listed stock price) falling back towards PLC (London-listed) or unchanged at best.”

A major factor in delaying the dual-listed structure for now is tax credits for the failed Ravens­thorpe nickel project in Western Australia, whose losses were made as part of the PLC company and which can be offset against profits from the giant Mount Arthur thermal coalmine in the Hunter Valley, also part of the PLC company.

A share price for B H P

Last month, BHP revealed that these credits had a net present value of about $US600 million and UBS estimates they will take five or six years to work through.

UBS also estimates the tax benefits of BHP’s Singapore trading hub being 42 per cent-owned by BHP’s PLC company have a value of about $US300m.

“There appears to be little compelling story to collapse in the next three years,” UBS said. “Post three years, after tax credits have been exhausted, then possibly.”

The DLC was formed in 2001, when BHP merged with London-listed Billiton, leaving about 60 per cent of the company’s shares listed in Australia and the rest in London. Since then, the Australian shares have traded at an average premium of about 15 per cent, UBS says.

Elliott, which holds 5 per cent of BHP’s London-listed shares, last year called for the structure to be unified under a primary British listing.

But it switched this after Scott Morrison in no uncertain terms said that that was not going to happen.

Of the $US22bn value claim in the Elliott-commissioned FTI analysis, $US14bn has been generally disregarded because it is based on the average performance of previous companies that unified their dual-listings at different times, on different exchanges and in different circumstances.

The remaining $US9bn is based on the release of pent-up franking credits and relies on an expected jump in Australian institutional and retail ownership of the group from 42 per cent now to 60 per cent within three years of unification.

If Australian ownership does not jump, the risk is that BHP’s franking credit pool gets whittled down quickly as they are distributed to international investors that cannot reap the benefits.

UBS, like BHP and Elliott, struggles to forecast how likely ­either scenario is.

“Assuming non-Australian tax residents continue to invest in BHP stock, franking credits would need to be distributed to those who are not able to use them,” UBS said. “It is difficult to estimate the register split if the collapse were to occur.”

UBS said that if it was all-Australian, BHP would make up 15 per cent of the Australian index.

“Many Australian institutional investors, which make up about 30 per cent of the Limited register, may not have a mandate that allows them to have such a large holding of one stock in their portfolio,” the report said, hence “you may not get as much up-weighting on the index as expected”.