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.
‘Self-serving’
“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.
Read also: BHP Billiton plans $820m petroleum exploration
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.”
Oil assets
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.
Competing priorities
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.