Republican party donor and hitman, vulture fund manager, climate change denier, opportunistic lawyer – the epithets garnered by Paul Singer, one of the richest businessmen in the US are extensive, even if pejorative.
That’s before considering his concerns about an electromagnetic pulse destroying the world.
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And there is also a softer side, since he was famously “outed” by The New York Times as a donor supporting the fight for gay rights in New York in mid-2011.
Across all of that one thing is very clear, Singer, 71, doesn’t resile from a fight.
His more celebrated stoushes include taking on a government trying to renege on its debts and locking horns with Volkswagen over its car emissions scandal.
One of his most notable deals was to acquire troubled parts units of US car makers, receive millions of dollars in government aid before selling out and pocketing a small fortune.
Now he has turned his sights on BHP Billiton.
In particular Singer has targeted the global miner’s clumsy dual-listed structure with separate corporate entities listed on the London Stock Exchange and the ASX.
Elliott Management Corporation CEO Paul Singer is never one to back down from a stoush. Photo: Bloomberg
Complying with two sets of listing requirements, shareholder meetings and the like, the structure has been a frequent source of focus over both the cost and the fact that the shares listed on the ASX trade at a significant premium to the British scrip.
Through funds under his control – Elliott Associates and Elliott Advisors – Singer argues that collapsing the dual-listing structure could unlock significant shareholder benefit.
Andrew Mackenzie, chief executive officer of BHP Billiton, has rejected Elliott’s proposals. Photo: Patrick Hamilton
BHP begs to differ.
In fact this week has seen considerable back and forth between the parties. BHP kicked things off rebuffing a detailed proposal on the matter put forward by the Singer funds telling investors there was little merit in changing.
You’d be naive to think they will just go away.
Senior corporate adviser
One of the prime concerns was the potential for so-called “flow-back” as offshore investors opted to sell out of BHP if it collapsed the dual-listed company structure and shifted its primary listing back to the ASX, which could erode the share price premium afforded BHP shares traded on the Australian market.
Elliott also argued a simpler structure with a single listing would make it easier to use company shares in any future acquisition, for example, which BHP counters by arguing it has two different scrips to use to pursue potential deals on the table.
The difficulty for BHP remains its US onshore petroleum assets. Photo: Bloomberg
Another worry was Elliott’s push for BHP to undertake a $US6 billion ($8 billion) share buyback now, as well as commit to regular buybacks – which has been rejected out of hand by the miner, which argues this would choke off using earnings to pursue growth options.
The hedge funds under Singer’s sway claim to have a 4.1 per cent “economic interest” in BHP’s British-listed arm. For its part, BHP says it has not been able to identify Elliott’s funds as shareholders, although it is thought the holding is via options and other counterparty agreements with other BHP shareholders.
The risks associated with an electromagnetic pulse ‘would cause a massive disruption to the electric grid’. Photo: Daniel Kalisz
By teaming up with other investors keen to force the board’s hand, shareholders controlling more than 5 per cent of BHP’s capital in Britain could pressure the board to hold shareholder meetings to consider proposals they put forward, although getting the support of both local and offshore investors would not be easy.
Nor is Singer unknown to local investors. His funds formed a joint venture in Britain with litigation funder IMF Bentham in 2014, which the local company sold out of late last year following a dispute with its partner. That British entity is now actively pursuing class actions in Europe, funding the action against VW for rigging emissions tests and also Tesco, the large British retailer. A litigation funder and a hedge fund getting into bed together wasn’t a marriage made in heaven with differing corporate goals and time scales leading to the split.
Illustration: Simon Bosch
And like most hedge fund managers, Singer and his fund managers look far and wide for unforeseen events which could either affect their investment strategy or throw up new investment prospects – such as the threat of a electromagnetic pulse destroying the world.
On the pulse
In a note to investors in his Elliott Management hedge fund a few years back , he wrote: “While these pages are typically chock-full of scary or depressing scenarios, there is one risk that is head and shoulders above all the rest.
“Even horrendous nuclear war, except in its most extreme form, can be a relatively localised issue, and the threat from asteroids can (possibly) be mitigated. The risks associated with an electromagnetic pulse … represent another story entirely.
“Today [it] would cause a massive disruption to the electric grid, possibly shutting it down entirely for months or longer, with unimaginable consequences.”
Referring to a massive solar storm of 1859 which caused havoc to telegraph networks at the time, he pointed to an event in 2012 when there was a similar sized burst from the sun, but the position of the Earth at that time prevented the burst from hitting it.
“The chances of additional events of such magnitude may be far greater than most people think …,” the letter to his investors warned.
Far-fetched? Maybe, but these concerns emerged at the same time Singer was pursuing a number of corporate jousts, seeking to oust the chief executive of Alliance Trust, a British fund manager and soon after that he emerged with a large stake in sprawling aluminium major Alcoa not long after it had outlined plans to split, by hiving off its auto and aerospace arm, while also moving on Samsung C&T, Dragon Oil and Dialog Semiconductor, to name just a few.
Between 2010 and 2015, Singer’s hedge funds were involved in as many as 35 such campaigns targeting with large companies globally, by one count, one of which, in 2015, was a British financial outfit Alliance Trust, where Singer only agreed to go away earlier this year after he was bought out by the company after a bitter spat.
Alcoa arm wrestle
Over at Alcoa, the row goes on. Alcoa spun out its units that supply the auto and aerospace sectors into a new arm, Arconic, where Singer has focused his attentions due to its poor financial performance. With 12 per cent of the spin-out, in February, Singer released a near-5000 word letter sent to independent directors in February as it sought board seats while calling for change at the top.
He came back again earlier this week. As he was prodding BHP, Singer’s funds released a detailed presentation on Arconic’s dismal performance and the need to dump the chief executive, prompting Arconic to argue that Singer’s proposal would pave the way for a $US500 million poison-put payment. He was also ramping up pressure on Azko, the chemicals conglomerate, to dump its chairman.
Anyone who thinks Singer will pack up his swag and go away quietly after its rebuff by BHP earlier this week is dreaming.
“You’d be naive to think they will just go away,” one senior corporate adviser said of Singer’s team’s push at BHP.
“They will critique the rebuttal. They could shop around other shareholders, they could seek to requisition a shareholder meeting in the UK, although that could work differently to the way it does in Australia. The wait is on to see now what they will come back with.”
Sources close to BHP point out that Singer has no track record in Australia and it may not fully be aware of local sentiment which may frustrate his ambitions.
“Retail investors are usually not a large factor in US companies, but with BHP they cannot be ignored,” this source said.
“They may have also underestimated the importance of some local issues such as FIRB,” referring to the Foreign Investment Review Board and the conditions imposed on the original agreement to merge with Billiton in 2001, with the commitment to retain the miner’s headquarters in Australia.
And given the earlier loss of local control of the Australian assets of Rio Tinto when it was reorganised in the mid-1990s sensitivities on this score remain, especially given the economic importance of the Pilbara iron ore deposits to Australia.
The difficulty for BHP remains its US onshore petroleum assets.
It paid too much which subsequent write-downs have made clear, while the weak near-term outlook for the oil price means the pain here is far from over. Even if BHP was touting this week that the arm was “free-cash flow positive” in the latest half.
For BHP shareholders with long memories, the heavy loss of shareholder value on its plunge into shale oil in the US recalls the $3.2 billion wasted on its ill-fated purchase of Magma Copper in the mid-1990s.
It extracted itself from this disaster in around 2003, soon after it had walked away from the environmental disaster of the Ok Tedi gold-copper mine in Papua New Guinea, while the final cost of the Samarco dam disaster in Brazil may yet take several years to finalise.
As Citi has argued in reference to the miner’s poor M&A track record: “Despite over $US30b spent, failed tilts at Rio and Potash Corp and overpaying for US Shale suggest M&A is not BHP’s raison d’être.
“The South 32 demerger has simplified the minerals business, but there is still more work to do in petroleum given the number of small non-core assets.”
BHP has long argued its diversified income stream would enable it to weather any economic cycle, a claim that came unstuck as commodity prices dived from 2015 with returns on invested capital collapsing to around 5 per cent, returns last seen in the 1980s.
The swift rebound in commodity prices during 2016, which ramped up in late 2016 thanks to regulatory change in China has given BHP’s share price – and investor returns – a new lease of life more recently.
But for those investors who are not convinced BHP’s rebound in both earnings and share price will be sustainable this may see them back Elliott’s tilt. In particular, the deepening pullback in the price of iron ore and the emerging share price pressure may help Elliott’s cause – especially in the light of BHP’s poor M&A track record.
“The response by BHP management to the Elliott plan misses the main point,” Elliott said in a statement overnight Wednesday.
“We put forward a set of proposals designed to reverse the company’s significant underperformance, fix the obsolete group structure, and optimise value for shareholders.
“The company’s answer – do nothing.
“Management wants to maintain a legacy, value-distorting dual-listed company structure, retain unchanged within the group the clearly undervalued US petroleum business and, rather than adopt a yardstick of accretive capital return, would leave stranded a significant and growing balance of valuable tax credits. Accepting the status quo will neither improve performance nor maximise shareholder value.”
Even though BHP continues to reject collapsing the dual-listed structure, it is worth keeping in mind that in 2014, at around the time it was considering the South 32 spin-out, under “Project River” a detailed review was carried out by Goldman Sachs of the proposed spin-out as well as collapsing the structure.
In a well-sourced report in mid-2014, The Times of London reported that upping stumps from London was on the cards, a little more than a year after Andrew Mackenzie, “the saxophone-playing former BP executive”, took over the running of BHP.
Project River “could lead ultimately to BHP pulling out of London, delisting its shares and closing its office in the capital to leave it with its original Australian listed stock and headquarters in Melbourne. BHP has poured cold water on the latter”, it reported at the time.
Then finance director Graham Kerr said in February 2014 the dual listing “has worked and continues to serve shareholders well”, a sentiment echoed by directors and senior management regularly since.