San Francisco - BHP Billiton is being targeted for an overhaul by occasional activist Elliott Management Corporation, which urged the world’s biggest mining company to spin off about $22 billion of US oil assets and list them in New York.
Elliott says BHP, which has two separate legal entities listed in Sydney and London that are run as one group, should unify into a single Australian-headquartered company, according to a statement on Monday. The New York-based hedge fund wants BHP to return capital through buybacks that would maximise tax credits and discourage expensive cash acquisitions.
The shares surged as much as 5.8 percent in London and closed 4.6 percent higher in Sydney. Elliott has also recently targeted firms including Arconic, Samsung Electronics, Marathon Petroleum and NRG Energy.
Elliott and hedge funds like them “play a useful role in terms of putting pressure on management, pushing agendas,” John Stopford, head of multi-asset income at Investec Asset Management, said in an interview on Bloomberg Television on Monday.
“Obviously, to some extent, it’s self-serving so I’m sure they are benefiting quite nicely from the bounce we are seeing in BHP Billiton’s share price,” Investec’s Stopford said. “It’s all very nice to build a coalition and get people behind you, but it also helps push the trade that you put on.”
Elliott, referring to talks already held with BHP management, said the changes could boost shareholder value by about 50 percent. The firm said it owns about 4.1 percent of BHP’s London-listed shares and has rights to acquire 0.4 percent of its Australian stock.
The stock gained 4.8 percent to 1,349 pence by 10:25 a.m. in London.
The miner has been slashing costs as it seeks to position for an era of meagre demand growth amid cooling economic expansion in China, the company’s top customer.
“Despite the first-class quality of most of BHP’s assets, BHP as an investment has underperformed,” Elliott, which manages about $33 billion, said in a letter to the company’s board. Most of that underperformance “has been driven by the incomplete status of management’s streamlining and value-optimization of BHP’s group structure and asset portfolio,” it said.
A Melbourne-based spokesman for BHP wasn’t able to immediately comment.
Elliott, led by billionaire Paul Elliott Singer, makes investments that typically involve complex legal analysis and corporate research. While most of its investments aren’t activist -- where it amasses shares and seeks changes to boost shareholder returns -- it’s those campaigns that often attract the most attention.
The hedge fund is involved in an ongoing dispute with Arconic, the jet- and auto-parts maker that split from Alcoa last year. Elliott is seeking to oust Arconic CEO Klaus Kleinfeld and replace four directors.
BHP Chairman Jacques Nasser in November 2015 defended the company’s structure as two listed firms, warning the costs of changing the setup would likely be high. Under terms of the 2001 merger of BHP and Billiton that created the group, holders of London or Sydney-listed shares receive equal cash dividends, according to the producer’s annual report. They remain separate legal entities, with BHP Billiton Limited trading in Australia and BHP Billiton Plc listed in London. It has previously said a London vehicle offers better access to global capital markets.
Revising BHP’s structure “probably has some merit,” but wouldn’t be easy, said Andy Forster, senior investment officer at Argo Investments Ltd., which manages more than A$5 billion ($3.7 billion) and holds BHP’s Sydney-listed shares. “The argument about access to capital markets is probably not quite as valid as it used to be.”
A spinoff of US oil assets would contradict the BHP’s recent focus on growth in that division, he said. The company is unlikely to carry out any radical changes before the appointment of a new chairman to replace Nasser, who said he’ll step down later this year, Forster said.
Elliott said BHP “took an important first step towards streamlining” with the 2015 spinoff of South32 Ltd., which included smaller operations across different commodities and focused BHP around key assets in iron ore, coal, copper and oil. The creation of Perth-based South32 reduced BHP’s portfolio from about 40 operations to 19 core assets.
Still, that move “actually magnified the inefficiencies” of BHP’s dual-corporate structure, leaving its London entity generating just 10.3 percent of revenue, Elliott said. The commodity producer should create a single company, which would continue to be managed from Australia and retain BHP’s current stock market listings, according to Elliott.
BHP, the largest overseas investor in US shale, should seek a separate listing of its U.S. onshore petroleum and offshore Gulf of Mexico assets on the New York Stock Exchange to realize their growth potential, said the hedge fund, which values the assets at $22 billion The business’s expansion opportunities are limited under BHP, which has competing priorities for capital allocation, according to Elliott.
The investment firm is also arguing BHP could buy back shares effectively at a 14 percent discount by making better use of about $9.7 billion accumulated franking credits, which offset taxes on Australian stock dividends. The proposed changes would also “help management to avoid making badly timed acquisitions paid for in cash,” Elliott said, and “increase the scope for management to pursue appropriate acquisition opportunities using unified BHP’s own shares.”
BHP lowered its dividend for the first time in 15 years in February 2016 amid weaker commodities prices and scrapped a guarantee of continually rising returns. The company switched to a policy to provide payouts at a minimum of 50 percent of underlying attributable profit.
Any separation of the petroleum business would mark a shift from the recent strategy under BHP CEO Andrew Mackenzie, who has been in his post for nearly four years. The company said in February that oil and copper are better placed in longer-term than materials including iron ore and coal. BHP will direct about three-quarters of capital expenditure over the next five years to the two favoured commodities, according to Macquarie Group Ltd. forecasts.
BHP in December outbid BP Plc to partner with Petroleos Mexicanos on the Trion oil field in the Gulf of Mexico. In February, BHP approved its $2.2 billion share of spending on the Mad Dog Phase 2 oil project. The company earned about 20 percent of its underlying profit from the global oil business in the six months ended December, less than half the proportion coming from iron ore, data compiled by Bloomberg show.