BHP Billiton dismisses Elliott's proposals

BHP Billiton has put out a detailed response to the proposals made by activist investor Elliott Advisors earlier in the week, saying Elliott "materially overstates the potential value that could be created".

The hedge fund suggested on Monday that BHP scrap its dual-company structure and maintain only a secondary listing in Sydney. In addition, it said the company should spin off its petroleum assets and adopt a consistent, value-optimised capital return policy to monetise the franking credits balance through discounted off-market buybacks.

Elliott reckoned the measures could boost shareholder value by 48.6% for Limited shareholders and 51% for PLC holders.

BHP responded at the time by saying that the risks and costs associated with the proposals would significantly outweigh any potential benefits.

On Wednesday, chief executive Andrew Mackenzie said: "Elliott's proposals are not new to BHP Billiton. We have assessed in detail many times over the past years options to unify the DLC structure and enhancements to our portfolio, including divestment of Petroleum. Consistent with our capital allocation framework, we regularly consider buybacks as an alternative use for our excess cash.

"Management has been engaged in discussions with Elliott over many months on its proposals and is familiar with the views expressed by Elliott. The elements of Elliott's proposal have also been considered by the board.

"The board and management have concluded that the costs and associated disadvantages of each element of Elliott's proposal would significantly outweigh the potential benefits. We believe that Elliott materially overstates the potential value that could be created by its proposals."

BHP said that unifying the dual listed company structure in the manner proposed by Elliott could destroy at least $1.3bn in value to save less than $2.5m a year, "for no identifiable material or strategic benefit".

The company also pointed out that its petroleum business remains core to its strategy and has the potential to create significant long-term value at high returns. BHP noted that in the last five years, the petroleum business has accounted for more than 20% of group production and more than 30% of group underlying earnings before interest, taxes, depreciation and amortisation.

As far as share buybacks are concerned, BHP said Elliott's suggestion that it mechanistically target a net debt ratio of 1.3x EBITDA and then conduct regular off-market buybacks, at a 14% discount, does not recognise the cyclical nature of the resources industry.

"If this approach had been adopted in 2012, BHP Billiton's net debt would now be more than double its current level - placing the company's balance sheet at risk, particularly in a time of volatile markets," it said.

Investec said BHP's response was good overall, but the reality is that in the volatile commodity environment, arguments from both sides have merit.

The brokerage said it is not convinced that BHP has adequately addressed the franking credit issue that underpinned part of Elliot’s argument, arguing from the basis of all shareholders in all jurisdictions, including Ltd holders and SA holders.

"While we are not sold on petroleum within a miner, it is core to BHP and a key differentiator, and Elliot’s suggestion to divest just part of it did not make sense.

"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. We think they can."

At 0900 BST, the shares were down 0.3% to 1,310.50p.