BHP Billiton is being targeted for an overhaul by sometimes-activist Elliott Management Corp., which is urging the world’s biggest mining company to unify its corporate structure, spin off more assets and improve capital returns.
The resources giant, which has two separate legal entities listed in Sydney and London that are run as one group, should unify into a single Australian-headquartered company, Elliott said in a press release Monday. The New York-based hedge fund is also urging BHP to seek a demerger of its U.S. petroleum business, which Elliott said is worth about $22 billion. Shares of BHP surged 4.6 percent to A$25.73 at the close Monday in Sydney.
Elliott is arguing BHP, which has a market value of about $96 billion, should return capital through buybacks that would maximize tax credits and discourage expensive cash acquisitions. The investment firm, which referred to talks already held with BHP management, said the changes could boost shareholder value by about 50 percent. Elliott said it owns about 4.1 percent of BHP’s London-listed shares and has rights to acquire 0.4 percent of its Australian stock.
“Despite the first-class quality of most of BHP’s assets, BHP as an investment has underperformed,” Elliott said in a letter to the company’s board. Most of that underperformance “has been driven by the incomplete status of management’s streamlining and value-optimization of BHP’s group structure and asset portfolio.”
A Melbourne-based spokesman for BHP said he couldn’t immediately comment.
BHP has been slashing costs as it seeks to position for an era of meager demand growth amid cooling economic expansion in China, the company’s top customer. Elliott, which manages about $33 billion, is adding BHP to a list of other companies it’s recently targeted including Samsung Electronics Co., Marathon Petroleum Corp. and NRG Energy Inc.
Chairman Jacques Nasser in November 2015 defended BHP’s current structure as two listed firms, warning the costs of changing the setup would likely be high. Under terms of the 2001 merger of BHP Ltd. and Billiton Plc that created the group, holders of London or Sydney-listed shares receive equal cash dividends, according to the producer’s annual report. They remain separate legal entities, with BHP Billiton Ltd. trading in Australia and BHP Billiton Plc listed in London.
Elliott said BHP “took an important first step towards streamlining” with the 2015 spinoff of South32 Ltd., which included smaller operations across a suite of commodities and focused BHP around key assets in iron ore, coal, copper and oil. The creation of Perth-based South32 reduced BHP’s portfolio from about 40 operations to 19 core assets.
Still, that move “actually magnified the inefficiencies” of BHP’s dual corporate structure, leaving its London entity generating just 10.3 percent of revenue, Elliott said. The commodity producer should create a single company, which would continue to be managed from Australia and retain BHP’s current stock market listings, according to Elliott.
BHP, the largest overseas investor in U.S. shale, should seek a separate listing of its U.S. onshore petroleum and offshore Gulf of Mexico assets on the New York Stock Exchange to realize their growth potential, the hedge fund said. The business’s expansion opportunities are limited under BHP, which has competing priorities for capital allocation, according to Elliott.
The investment firm is also arguing BHP could buy back shares effectively at a 14 percent discount by making better use of about $9.7 billion accumulated franking credits, which offset taxes on Australian stock dividends. The proposed changes would also “help management to avoid making badly timed acquisitions paid for in cash,” Elliott said, and “increase the scope for management to pursue appropriate acquisition opportunities using unified BHP’s own shares.”
BHP lowered its dividend for the first time in 15 years in February 2016 amid weaker commodities prices and scrapped a guarantee of continually rising returns. The company switched to a policy to provide payouts at a minimum of 50 percent of underlying attributable profit.
Any separation of the petroleum business would mark a shift from the recent strategy under BHP Chief Executive Officer Andrew Mackenzie, who has been in his post for nearly four years. The company said in February that oil and copper are better placed in longer-term than materials including iron ore and coal. BHP will direct about three-quarters of capital expenditure over the next five years to the two favored commodities, according to Macquarie Group Ltd. forecasts.
BHP in December outbid BP Plc to partner with Petroleos Mexicanos on the Trion oil field in the Gulf of Mexico. In February, BHP approved its $2.2 billion share of spending on the Mad Dog Phase 2 oil project. The company earned about 20 percent of its underlying profit from the global oil business in the six months ended December, less than half the proportion coming from iron ore, data compiled by Bloomberg show.
Elliott, led by billionaire Paul Elliott Singer, makes investments that typically involve complex legal analysis and corporate research. While most of its investments aren’t activist -- where it amasses shares and seeks changes to boost shareholder returns -- it’s those campaigns that often attract the most attention.