BHP Billiton (BHP) shares bolted higher yesterday (taking the wider market up by nearly three quarters of a per cent) after a hedge fund released a letter it had sent to the board urging the company to spin off some of its petroleum business and list it on stockmarket.
Before then Elliott Management (which holds 4.1% of BHP’s London Plc company’s shares) wants the dual Australia – UK company unified with the company listed on the ASX. Then for the spin off of the US petroleum business to happen and to be listed in New York.
Elliott also wants BHP to adopt a consistent capital return policy that would allow it to take advantage of its substantial franking credit balance through off-market buybacks, rather than using its excess cash “to make value destructive acquisitions”, Elliott said.
The US business contains the company’s growing assets in the Gulf of Mexico as well its huge shale oil and gas assets.
Elliott claims its plan could boost shareholder value for BHP Billiton Ltd by up to 48.6% and up to 51% for UK PLC shareholders.
Elliott’s letter was released late in the day and the jumped in the last half hour of trading on the Australian share market on Monday.
BHP shares jumped from $24.82 at around 3.30pm to close 4.6% higher at $25.73.
Elliott says it has engaged in talks with senior members of BHP’s management but hasn’t disclosed who.
It is understood BHP has not been aware of the details of Elliott’s proposals because Elliott only sent a letter to BHP directors outlining its suggestions on yesterday, Monday, April 10.
BHP Billiton had not yet commented on the Elliott proposals.
Elliott said in the letter that despite being a global resources company with best-in-class assets, BHP in recent years had underperformed as an investment asset compared to comparable mineral and petroleum companies.
"Unfortunately, despite the progressive and successful demerger of South32 in May 2015, BHP’s management still cannot deliver optimal shareholder value without resolving the shareholder value inefficiencies caused by its dual-listed company structure; monetising the intrinsic value of BHP’s US petroleum business, the value of which is being obscured by its continued inclusion within the group; and enhancing capital management to an optimal level," Elliott said.
Elliott said it was making its letter publicly available so that all shareholders could be aware of the details of its plan.
It is also a rather limp way of pressuring BHP from a position of weakness because most of the big shareholdings are in BHP’s Australian listed shares.
In a statement issued overnight BHP rejected the Elliott plan, saying the costs would outweigh any benefits.
“After reviewing the elements of Elliott’s proposal, we have concluded that the costs and associated risks of Elliott’s proposal would significantly outweigh any potential benefits," BHP said in a statement.
"There is no obvious discount in BHP Billiton’s trading multiples relative to the weighted average of relevant mining and oil and gas peers," it said.
It also said it regularly reassessed how to create value and reviewed company structure. It had spoken with Elliott over many months and would consider a more detailed response, it added.
For now, it dismissed Elliott’s plan for buying back shares as "a formulaic approach without regard for the cyclical nature of the resources industry or the returns available from other uses of cash".
BHP said it had also taken many steps to increase shareholder value, cut the number of assets in its portfolio by $US7 billion since 2013 and cutting unit costs by more than 40% .
"We have laid the foundations for the group to substantially grow the base value of its operations," BHP said in its statement. “Elliott’s proposal would put this at risk,” it added.
After being up more than 6% in early London trading the shares eased back and closed up 2.2%.
