BHP Billiton activist's changes need to pass Australian 'national interest test'

Australia's Treasury department has warned that any of the major changes to BHP Billiton's corporate structure proposed by activist fund Elliott Management would need to be in the country's national interest.

The statement on Tuesday followed a letter from hedge fund Elliott on Monday that proposed BHP scrap its dual-company structure and only maintain a secondary listing in Sydney.

“A change in the corporate structure and listing arrangement would need to be carefully considered against the provisions of the Foreign Acquisitions and Takeovers Act,” a Treasury spokeswoman said.

“If the changes were significant they would need to be consistent with Australia’s national interest test under that Act.”

In 2001, the Australian government approved the merger of Melbourne-based BHP Limited and London-based Billiton Plc under a dual-listed company structure, but only subject to a number of conditions "designed to ensure that the merger would not be contrary to Australia's national interest".

The DLC structure means the two companies operates as if they were a single economic enterprise, with a single management and board, while remaining separate legal entities.

The conditions laid down by the Treasury included that the BHP Limited remains an Australian resident company, listed on the Australian Stock Exchange; that the headquarters of BHP Limited and the global headquarters of the group are in Australia; that both the CEO of the group and CFO of BHP Limited have their principal place of residence in Australia.

But one condition was that if BHP Limited wishes to act differently to these conditions, it could seek and obtain approval from the Treasury.

Elliott proposes unification

On Monday, the BHP board issued a statement saying it had concluded that "the costs and associated risks of Elliott's proposal would significantly outweigh any potential benefits".

Elliott sees a potential big boost to shareholder returns from ending the DLC structure and creating a single Australian-headquartered and Australian tax resident listed company, with a primary listing in London and a secondary listing in Sydney.

Following the May 2015 spin-off of BHP's 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.

This "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.

BHP said it often reviewed the DLC structure, but had "not yet identified sufficient benefits to outweigh the significant costs which would be incurred" from unification.