It is also a better deal than the various counter-factuals.
Like BHP spinning off its oil and gas business into a separate – and therefore sub-scale and therefore long-term challenged business; and with Woodside itself remaining sub-scale.
Like BHP taking over Woodside, paying a premium to Woodside holders (as opposed to the nil-premium, to both sets of holders in the merger) and significantly boosting oil and gas in the BHP mix.
That was just never going to happen. Climate change issues aside, BHP effectively set in train its long-term exit from oil and gas when it (very sensibly) walked away from US shale oil and gas.
The best way to understand the deal and its upside for BHP holders, is that they swap one share in BHP’s oil and gas for a half-share in that going forward plus a half-share in Woodside’s business plus a half share in the upside generated by the merger itself.
BHP holders actually get 48 per cent of the enlarged entity, with Woodside holders 52 per cent. I’ve rounded it off at 50-50 just to make for an easier projection. That upside comes in three forms. The straightforward cost savings and synergies from the merger, from any merger – most obviously, two head offices pruned to one.
The upside able to be generated by working off a bigger – a doubled – base, operationally, structurally; and third, the investment rating of the bigger, global scale, entity.
All this was both highlighted and reinforced by the simultaneous commitment to the $US12bn ($16.7bn) Scarborough project. That would have been too big a bite, or at least a ‘challenging’ one, for Woodside on its own (more specifically, its majority share).
But combined with Woodside’s utility-style sale of a 49 per cent stake in the gas processing part of the Scarborough project to a group of investors, it can be both comfortably and optimally fully accommodated within the doubled Woodside. Again, very importantly, the BHP assets go into Woodside without accompanying debt. Woodside’s gearing drops sharply, enabling it to both do Scarborough and be better placed in balance sheet terms for further expansion.
All this is about making for a better (enlarged) Woodside. It’s also net beneficial for BHP – including the exact opposite outcome in relation to BHP’s gearing. With unchanged debt and a reduced asset base, it goes up, precisely when BHP is rolling in Chinese cash thanks to iron ore. Yes, the deal increases BHP’s reliance on iron ore, making it more like Rio; but it does so just as BHP launches into potash and wants to go bigger in copper and other battery-focused minerals.
Simply, it makes for a much more defined and manageable – operationally, financially and strategically – future than an on-going BHP of iron ore dominance, the mix of other minerals (and ambitions) and oil and gas which has very different operational and capital dynamics. Now the same outcome for the on-going BHP would have been achieved by simply hiving off oil and gas into a separate entity – the straightforward classic de-merger. BHP holders would have ended up with one ‘pure’ BHP share and one BHP ‘O&G’.
They would not though have got the upside from the merger that I described above. The other big benefit of having two shares in two very different companies where they had only one before is that holders can make far more focused investment decisions and allocations.
The only real process to get past is a vote by Woodside holders. BHP holders don’t get to vote.
More Coverage
Investors punish James Hardie over costly $14bn buyout
James Hardie has become the latest Australian listed company to face the wrath of investors over a big acquisition.
Never-ending holiday-maker raises $2m to build quantum chips
Felix Thomsen was only meant to spend a year in Australia, but a decade later he has founded a company to accelerate the development of quantum computers.
The merger of Woodside Petroleum and BHP’s oil and gas business is a clear and significant win-win for both sets of shareholders. It really is a case of one and one adding up to something more than two.