LONDON (Reuters Breakingviews) - Elliott Advisors’ plan to unlock more value from BHP Billiton has some merits. Tidying up and then breaking up could make shareholders in the Anglo-Australian miner roughly 50 percent better off, the activist investor argues. Elliott isn’t saying anything BHP hadn’t already considered, and a full split looks a stretch – but it may prompt a helpful spring clean.
There are three parts to Elliott’s agenda. The hedge fund – which owns 4.1 percent of BHP – would like to see separate London and Australian corporate entities crunched into one business headquartered in Melbourne but with a primary listing in London. It wants to spin off BHP’s petroleum business in the United States, which it values at $22 billion, and list it in New York. Finally, Elliott wants BHP to make use of stored-up tax credits, and buy back shares more cheaply, for at least $6 billion.
The first two bits are the most compelling. BHP’s two-headed structure is a historical accident born out of the merger of BHP and Billiton in 2001, not a strategic move. Collapse them into one, and BHP could hand out some of the $9.7 billion of tax vouchers known as “franking credits” that currently are only available to Australian investors in the Sydney-listed shares. Because the Sydney shares trade at a premium to their London counterparts, merging them would also give a new, lower price from which the discount in a tender-offer buyback – effectively capped at 14 percent in Australia – can be calculated. It’s tinkering, but worth a go.
A breakup is trickier. True, splitting off BHP’s petroleum business could have some benefits. Oil peers such as EOG and Apache trade on multiples of between nine and 11 times forward EBITDA. BHP trades at about seven times, along with pure-play mining rival Rio Tinto, suggesting the benefits of owning a big oil business aren’t fully grasped by shareholders. But there’s no sign the company is run any the worse for being diversified. Splitting would also amount to an embarrassing reversal of corporate strategy for management.
Elliott reckons just the tidy-up and franking credit usage alone could add around 10 percent to BHP’s value. BHP says the costs outweigh the benefits. The shares rose nearly 5 percent on Monday, suggesting the pressure for a breakup is weak. Still, two out of three isn’t bad – and the onus is now on BHP to explain why it works better together.