Institutions silent on Elliott’s BHP ‘robbery’

Local institutions should be raising the alarm on Elliott’s planned “theft” from Aussie BHP shareholders. But they’re silent.

Paul Singer, president of activist fund Elliott Management.

The old saying, “if you pay peanuts you get monkeys” has taken on a strange new meaning among many Australian institutions that are BHP shareholders.

At BHP, the Elliott group is brilliantly engineering the debate so that overseas shareholders can steal part of Australian shareholders’ valuable franking credits rights.

The local institutions should be raising the alarm but they are silent. Worse still, one or two of the institutions are actually encouraging Elliott to take the money entitlement out of Australian shareholders’ pockets.

They are akin to the poorly-performing workers described as “monkeys” in the old saying. But surely they are not paid “peanuts”. Oh yes they are — at least according to the official statistics.

Fund managers and analysts who manage funds branded by AMP, Commonwealth Bank’s Colonial, NAB’s MLC, BT, and other retail funds are indeed being paid “peanuts”, or at least that’s what the funds tell APRA.

In the June 2016 annual superannuation statistics submitted to APRA there is a column called “investment fees” where superannuation funds disclose their investment fees. A lot of them, mainly industry funds, disclose that large amounts of money are spent on investment management fees but it’s usually around or below 0.4 per cent of assets.

But the big name funds mentioned above and others tell APRA that their investment fees are NIL. Yes that’s right — NIL. In theory that means that all those luxury cars and expensive dwellings that we see investment analysts enjoying are mirages.

I am of course jesting about “peanuts”. Clearly there is some secret deal, which sees the investment people showered with money in a way that which escapes the APRA net. It would seem that APRA is asleep in enforcing fee disclosure on all funds and hopefully the royal commission will get to the bottom of it because clearly the investment people are being paid, as they should be.

But the fact that the “nil investment fee” institutions are not screaming at the franking credits robbery being engineered by Elliott shows that they are not looking after their Australian customer base.

In former years the people at the top of the big institutions kept a close eye on matters like this and knew what was happening inside the companies.

But increasingly many of the big institutions, particularly retail funds, are indexing or contracting out their investments tasks so they no longer are close to what is happening. And most of those investment managers are not long-term thinkers, which are why many retail funds missed the infrastructure boom, which helped many industry funds record higher rates of return.

Let me explain how BHP Australian shareholders are being robbed under the Elliott plan. The total BHP enterprise is owned 40 per cent by the London BHP company and 60 per cent by the Australian BHP company. In turn the Australian company is owned about 70 per cent by Australian shareholders. Elliott wants the two companies to merge.

In nominal terms, both companies pay the same dividend but shares in the Australian company carry a premium over the London company partly because the Australian dividends are franked — accordingly Australian based shareholders receive more money than those in the London Company.

Better still for the Australian company’s local shareholders the BHP people who did the original dual listing deal knew that franking credits have no value for London shareholders so the Australian company keeps the London company’s theoretical franking credits — in other words Australians get something akin to a double dose of franking credits

In recent years BHP has had borrowings that were too high so the value of those extra franking credits has not been exploited because BHP could not afford to distribute them. But that’s about to change.

BHP chairman Ken MacKenzie, left, with CEO Andrew Mackenzie.

BHP’s target borrowing level is around $US10 billion to $US15 billion and borrowings are currently around $15 billion — the top end of the range. BHP will sell its US shale interests for in the vicinity if $US10 billion so there can be a $US5 billion return to shareholders either via a buy back or a bonus dividend. The return could be larger. And if mineral prices stay strong and BHP cuts its costs as it envisages then we will see even more cash to be distributed to shareholders.

The store of Australian franking credits can be used in both bonus dividends and the buyback of Australian stock. Their time has come.

BHP has around $US 11 billion in stored up franking credits. The latest interim dividend level probably distributes around three quarters of the franking credits generated by the Australian company in the half year. If it’s all one company then the franking credits will be spread among all shareholders--- in other words “double dose” of franking credits for Australians is being be stolen and spread around shareholders who have no use for them.

It’s true that if the two companies are merged they will have a larger place on the indices so will attract more buying from the index linked portfolios of institutions. In addition, the discount that is embedded in the UK company’s stock price will be eliminated but so might the Australian franking premium. Then there is the cost of the merger, which BHP believes will be around $1 billion.

Elliott disagrees with the cost. All those issues can be debated and there is a clear case that the merger could be good for London company BHP shareholders.

What can’t be debated is that Australians would lose an entitlement. And what also a cannot be debated is that APRA and the royal commission need to determine what the retail funds actually pay for investment management so their reports are consistent with the industry funds.

And those at the top of the big institutions need to start watching what their “monkeys” are doing and intervene when they start siding with overseas shareholders in the theft of Australian entitlements.