BHP Billiton rebuffs activist Elliott's demands for change

BHP Billiton directors have been urged by activist investor Elliott Management to cancel the mining giant's dual listing alongside a £22bn disposal of its US petroleum business.

On top of tweaks to its capital return policy, the hedge fund said these measures would together result in Plc shareholders enjoying a 51% increase in the attributable value of their shares.

After reviewing the elements of Elliott's proposal, the BHP board issued a statement saying: "we have concluded that the costs and associated risks of Elliott's proposal would significantly outweigh any potential benefits".

Shares in BHP, having spiked more than 4% to 1,350p on Monday morning, retreated after the company's negative response.

Elliott, which owns a stake of around 4.1% in the FTSE 100-listed group and will be known to UK investors for its activism in Meggitt and Alliance Trust, sent a letter to BHP's directors and set up a website outlining its three-point plan to "unlock value and improve capital returns to shareholders".

Ending BHP's dual-listed company structure by creating a single Australian-headquartered and Australian tax resident listed company is a prime demand, as following the May 2015 spin-off of its base metals and coking coal assets into South32, Elliott estimated that the London-listed Plc part of the business generates only around 8.9% of group operating profits while its shares account for 39.7% of BHP's total.

The "long-term misalignment" of profits versus shareholder base in the dual-listed company structure "has led to a massive and continuing build-up of franking credits", which it puts at a total of $9.7bn, or around 10% of BHP's market capitalization.

A unification of the two listings would not only put BHP's Limited and PLC shareholders "on the same footing", but also allow BHP to access the value represented by the US$9.7bn franking credit balance, "significantly enhance" the scope and value of BHP share buybacks, and "help management to avoid making badly timed acquisitions paid for in cash".

The letter demanded demerging and separately listing the US petroleum business, which is valued "well in excess of the current analyst consensus" at around $22bn, as it "provides no meaningful diversification benefits to BHP", entails a "lack of synergies" with the group's mining assets and "its intrinsic value is being obscured".

And, with BHP expected to generate $31bn of excess cashflow in the next five years, assuming the current 50% payout ratio of net income, Elliott was unstinting in its directness.

"Unfortunately, BHP has previously used excess cash to make value-destructive acquisitions when it acquired certain Fayetteville assets and Petrohawk. Management should avoid making badly timed acquisitions for cash and instead return its substantial upcoming excess cashflow to shareholders by way of highly value-accretive post-unification 14% discounted off-market share buybacks."

In its response, BHP said it was constantly reviewing the dual-listed company structure, but had "not yet identified sufficient benefits to outweigh the significant costs which would be incurred" from unification.

BHP also rubbished Elliott's proposal to demerge the oil business, saying: "There is no obvious discount in BHP Billiton's trading multiples relative to the weighted average of relevant mining and oil and gas peers.

"BHP Billiton has disclosed the information the market needs to fully value the petroleum business. BHP Billiton's approach is to optimise the long term value of the Petroleum business through operating excellence."

As for the accusation that the company was not returning enough of its excess cashflow to shareholders, BHP pointed out that since 2001 it has returned roughly $23bn to shareholders via buybacks and approximately $56bn in cash dividends, having reduced the number of assets in the portfolio by more than one third since 2013 and cutting unit costs by more than 40%.

"Under BHP Billiton's updated dividend policy, shareholders now receive a minimum 50% of underlying earnings as a dividend each period. We have introduced a rigorous capital allocation framework, which balances value creation, cash returns to shareholders and through the cycle balance sheet strength in a transparent and consistent manner. In doing so, we have laid the foundations for the group to substantially grow the base value of its operations.

"Elliott's proposal would put this at risk."