FILE PHOTO: Copper anode stacks can be seen at BHP Billiton's Olympic Dam copper and uranium mine located in South Australia, May 24, 2016. REUTERS/Sonali Paul/File Photo
SAN FRANCISCO: BHP Billiton is being targeted for an overhaul by sometimes-activist Elliott Management Corp, which is urging the world’s biggest mining company to spin off about US$22bil of U.S. oil assets, improve capital returns and unify its corporate structure.
Share of the resources giant surged 5.4% in London and closed 4.6% higher in Sydney on Monday after the New York-based hedge fund added BHP to a list of companies it’s recently singled out including Samsung Electronics Co., Marathon Petroleum Corp. and NRG Energy Inc.
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, Elliott said in a statement Monday.
The investment firm is arguing BHP, which has a market value of about US$96bil, should return capital through buybacks that would maximize tax credits and discourage expensive cash acquisitions.
Elliott, which referred to talks already held with BHP management, said the changes could boost shareholder value by about 50%. The firm said it owns about 4.1% of BHP’s London-listed shares and has rights to acquire 0.4% of its Australian stock.
The miner has been slashing costs as it seeks to position for an era of meager 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 US$33bil, 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 said he couldn’t 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.
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 Ltd. and Billiton Plc 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 Ltd. trading in Australia and BHP Billiton Plc listed in London. It has previously said a London vehicle offers its 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$5bil (US$3.7bil) and holds BHP’s Sydney-listed shares.
Also, “the argument about access to capital markets is probably not quite as valid as it used to be,” he said by phone.
A spinoff of U.S. oil assets would contradict the producer’s recent focus on growth in that division, he said.
BHP 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 spin off of South32 Ltd., which included smaller operations across a suite of 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% 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 U.S. 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 US$22bil.
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% 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% of underlying attributable profit.
Any separation of the petroleum business would mark a shift from the recent strategy under BHP Chief Executive Officer 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 favored commodities, according to Macquarie Group Ltd. forecasts - Bloomberg.
Limited time offer:
Just RM5 per month.
