BHP’s tale of two listings

De­trac­tors claim that BHP Bil­li­ton would be bet­ter off if it were to do away with its Aus­tralian list­ing.

Finweek English Edition - - THE WEEK IN THE NEWS - By David McKay ed­i­to­rial@fin­

oneof the in­ter­est­ing as­pects to emerge from BHP Bil­li­ton’s re­cent run-in with in­vestor ac­tivism was the claim that it was bet­ter to re­turn spare cash to share­hold­ers rather than “wast­ing” it on new ac­qui­si­tions.

El­liott Man­age­ment, a hedge fund with some $31bn in as­sets un­der its con­trol, has been crit­i­cal of the min­ing group’s dual-listed struc­ture (DLC), which con­sists of BHP Bil­li­ton plc in the UK and BHP Bil­li­ton Ltd in Australia. El­liott said the struc­ture was un­wieldy and that sav­ings could be made by main­tain­ing a sin­gle share in the plc, in which it has a 4.1% stake.

Dis­pens­ing with the Aus­tralian share would also re­lease frank­ing cred­its. These are tax ben­e­fits the com­pany is able to hand on to in­vestors so that they don’t suf­fer the ef­fects of dou­ble tax on their in­vest­ments. A sin­gle cap­i­tal re­turn pro­gramme would be bet­ter than us­ing ex­cess cash “to make val­uedestruc­tive ac­qui­si­tions”, it added.

An­a­lysts think a pos­i­tive from this de­bate is that share­hold­ers are putting pres­sure on man­age­ment teams to de­liver cash re­turns to share­hold­ers. In­vestors are still clearly wary of min­ing com­pany man­age­ment mis­al­lo­cat­ing cap­i­tal. Take for in­stance the in­crease in to­tal in­dus­try net debt to $213bn be­tween 2011 and 2014 from $4bn in the years 2007 to 2010.

Asked if El­liott’s in­vestor scep­ti­cism was re­flec­tive of a broader dis­af­fec­tion for growth by ac­qui­si­tion, BHP Bil­li­ton CEO An­drew Mackenzie said his man­age­ment team “al­ways has to prove it­self”.

“It’s all about mak­ing sure that we make good use of ev­ery dol­lar of free cash flow, in­clud­ing giv­ing the money back to share­hold­ers. There isn’t an ei­ther/or. We will test that spare dol­lar once we have clearly guar­an­teed the in­tegrity of our as­sets and the strength of the bal­ance sheet,” Mackenzie ex­plained.

“Then it’s a choice. We look at projects we can in­vest in and we look at in­creas­ing div­i­dends and we look at ac­qui­si­tions. In all these cases we are look­ing at value cre­ated and the re­turn,” he said.

“Most of our share­hold­ers would agree that the best type of in­vest­ing is counter-cycli­cally by in­vest­ing in the bot­tom of the cy­cle. We need a strong bal­ance sheet to have fire­power for op­por­tu­ni­ties in the low points of the cy­cle,” he added in ref­er­ence to El­liott’s call for an ag­gres­sive buy-back pro­gramme. Said In­vestec Se­cu­ri­ties in a re­cent note: “Like El­liott, we look at fore­cast cash flows and fret over how they are go­ing to be spent, but BHP does have a long history of special re­turns. Un­for­tu­nately, it also has a history of wasted ac­qui­si­tions which we hope cur­rent man­age­ment can re­sist,” it added. “We think they can.” As for re­mov­ing the DLC struc­ture, Mackenzie gave short shrift to the no­tion. Some $1.3bn of value would be de­stroyed, he said, com­pared to the rel­a­tively mea­gre $2.5m that would be saved an­nu­ally. An­a­lysts are also con­cerned how the BHP Bil­li­ton plc struc­ture would trade. “There is a real risk in our view that a com­bined sin­gle-listed en­tity could trade to­wards the UK multiples rather than main­tain the Aus­tralian multiples,” said Mac­quarie in a re­cent re­port. “The key ques­tion in our mind re­mains, does the UK stock trade at a dis­count or the Aus­tralian stock at a pre­mium?” Mackenzie be­lieves the Aus­tralian share trades at a pre­mium to the UK ver­sion ow­ing to the tax cred­its it con­tains. “It’s not some­thing we should do some­thing about; it’s just the val­u­a­tion,” he said. For now, the dust is set­tling on the mat­ter with BHP Bil­li­ton hav­ing sternly re­sisted El­liott’s pro­pos­als which, im­por­tantly, were be­ing dis­cussed pri­vately for months be­fore the hedge fund made its dis­plea­sure public – per­haps in an ef­fort to can­vass wider in­vestor sup­port for its ideas. “We have had many dis­cus­sions with share­hold­ers and we have many sup­port­ers of the strat­egy that we are cur­rently fol­low­ing,” said Mackenzie when asked if share­hold­ers among the ranks of its reg­is­ter might feel sim­i­larly to El­liott. “It doesn’t mean in re­ject­ing El­liott that we are not open to other ideas; we are hun­gry for any thoughts that we may have missed.”

BHP Bil­li­ton’s Olympic Dam mine is lo­cated north of Ade­laide, Australia.

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