Elliott Management’s plans to spin off BHP’s 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 has been killed off this week, after Scott Morrison declared that “The Big Australian is going to remain Australian”.
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 Management 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 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, and the company’s case was further strengthened 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.
The demerger and buyback elements of the proposal may be non-starters, but there is speculation that the unwanted approach is more a trading opportunity than a genuine attempt to unlock value.
The appositeness of a mining company owning a petroleum business has been debated since BHP drilled its first wells in Bass Straight in the 1960s, and 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.
At the same time BHP’s $US20 billion foray into the US shale gas industry has generated huge write-downs and almost no cash returns.
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.
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 billions of capital, and it is possible Elliott could follow suit.
It will subject The Big Australian to added scrutiny, which can only be a good thing for shareholders.