When Scott Morrison declared “The Big Australian is going to remain Australian”, you could almost hear the cheers emanating from BHP Billiton’s Melbourne head office.
11 million tonne blast at Jimblebar mine
It’s broken WA iron ore record for the largest open cut mine blast – an 11 million tonne blast with over 6,410 electronic detonators across 51 hectares of ground. Vision: BHP Billiton Western Australia
For the past month BHP has been kept busy repudiating a proposal from New York activist investor Elliott Management whose scalps include the Argentinian government and, more recently, the chief executive of US jet-and-car-parts maker Arconic.
Led by aggressive financier, Paul Singer, Elliott wants BHP to spin off its US petroleum business, hand back more money to shareholders through share buybacks and collapse the company’s dual listings in the UK and Australia into one primary listing on the London Stock Exchange.
The Treasurer’s blunt rhetoric last week about the evils of “foreign corporate raiders” killed off what little chance Elliott had of achieving the last of its three goals. That Morrison went so far as to threaten Elliott with criminal sanctions if it tried to kill BHP’s dual-listed structure also underlined how far-fetched elements of its proposal are.
BHP, which has rejected Elliott’s proposal, would be within its rights to argue Morrison’s intervention harmed the hedge fund’s credibility. Indeed, the company’s case was further bolstered on the same day by rating agency Moody’s which warned it may downgrade BHP’s debt if the plan to boost buybacks is implemented.
Nevertheless, a bad week for Elliott is no reason for complacency.
The demerger and buyback elements of the three-pronged proposal may be non-starters. And there is plenty of speculation that the unwanted approach is more a trading opportunity than a genuine attempt to unlock value.
Andrew Mackenzie, chief executive officer of BHP Billiton. Photo: Patrick Hamilton
Yet if Elliott’s past performance is any guide, this skirmish could form part of a protracted battle. After all, BHP is dealing with an adversary that fought Argentina in the courts for 13 years before settling.
Exactly what Elliott does next remains unclear. Its options are limited given it claims to have an economic interest in 4.1 per cent of the UK shares which is a relatively small holding if you are in the business of overthrowing boards.
Paul Singer’s hedge fund firm Elliott Management has put pressure on BHP. Photo: Bloomberg
One obvious course of action is to zero in on the element of its proposal that may get some traction: the spin-off of BHP’s US oil division, which includes onshore shale assets and fields in the Gulf of Mexico.
The appropriateness of a mining company owning a petroleum business has been debated ever since BHP drilled its first Bass Straight wells in the 1960s. Elliott has chosen a good time to reheat the debate given one of the key arguments for the petroleum strategy – that oil is a countercyclical balance to minerals – has proved wrong in recent years as energy and mineral prices have fallen in tandem.
The blunt rhetoric about the evils of ‘foreign corporate raiders’ killed off what little chance Elliott had.
At the same time BHP’s $US20 billion foray into the US shale gas industry has generated huge writedowns and almost no cash returns.
Question of scale
Yet even those BHP shareholders who question the merits of the mining-petroleum model have their doubts about Elliott’s proposal. By spinning off only the US assets, BHP would be left with a sub-scale business that would exacerbate the problem of the oil business being undervalued by the market. Many UK and Australian investors would not be able to hold shares in the new company which would be listed in the US.
BHP has effectively signalled that it would be open to offloading the onshore shale assets at the right time. Yet it believes this moment is yet to arrive as prices for Permian Basin acreage in Texas, where BHP is a major player, continue to improve.
While Elliott has thus far failed to galvanise other BHP shareholders into action, the hedge fund may enjoy more support if BHP shares continue to lag. Over the past two years BHP shares are down 25 per cent compared with a 3.3 decline for rival Rio Tinto and a 2.5 per rise for the S&P/ASX 200. The November 2015 Samarco dam disaster in Brazil has not helped matters but the numbers make for unpleasant reading for BHP investors.
If Elliott does decide to stick around, expect performance to become a key battleground. Another activist fund, Tribeca, last week generated large amounts of publicity by calling for an overhaul of BHP’s board, which it claims is responsible for blowing up $US30 billion of capital. It is possible Elliott, which is not afraid to target directors, could follow suit.
BHP must be careful not to confuse a lack of shareholder support for Elliott’s proposal as a vote of confidence in the company’s track record. As Anglo-Dutch conglomerate Unilever discovered when it rebuffed a $US143 ($192) share takeover bid from US food giant Kraft Heinz in February, resentment about underperformance can bubble to the surface even as investors side with boards over the merits of hostile approach.
Foreign raiders are looking to take BHP Billiton offshore – I have a simple message for them – hands off our biggest miner. pic.twitter.com/BjBT4IAZdo
— Scott Morrison (@ScottMorrisonMP) May 4, 2017
Just days after Heinz withdrew its bid, Unilever announced a “comprehensive” review of its assets and conceded returns were not meeting expectations. The result of the aborted bid was to put the company on notice.
It is a similar story for BHP where chief executive Andrew Mackenzie began the comments section of the latest production report with the promise: “Everything we do at BHP Billiton is designed to create value for all of our shareholders, today and for the long term.”
Elliott’s proposal may be shaky and certainly reinforces the view of Argo Investments managing director Jason Beddow who recently told The Australian Financial Review that, “just because you are an activist – it doesn’t mean you are right”.
But it will subject The Big Australian to added scrutiny. This can only be a good thing for shareholders.