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.
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.