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Elliott’s “Shareholder Value Unlock Plan” to Increase 50% or $46B Value of BHP

Elliott Management’s Letter and Presentation to BHP Billiton’s Board, April 10, 2017
BHP Billiton’s Review of Elliott Proposal, April 12, 2017

Introduction:

  • Elliott holds long economic interest in BHP of approximately 4.1% of issued shares
  • Despite being a leading global resources company with a portfolio of best-in-class large-scale diversified mining assets, BHP has underperformed a portfolio of comparable mineral and petroleum companies
  • Despite the progressive demerger of South32 in May 2015, management still cannot deliver optimal shareholder value without:
    • Resolving the shareholder value inefficiencies from dual-listing
    • Monetizing the intrinsic value of US petroleum business
    • Enhancing capital management to an optimal level
  • BHP Shareholder Value Unlock Plan is designed to address these issues with 3 key steps:
    • Unifying BHP’s dual-listed company structure into a single Australian-headquartered and Australian tax resident listed company
    • Demerging and separately listing BHP’s US petroleum business on the NYSE
    • Adopting a policy of consistent and value-optimized capital returns to shareholders
  • Analysis shows that implementation of this plan could enable management to provide shareholders with an increase in value of up to 48.6% (limited shareholders) / 51% (PLC shareholders)

Step 1: Unifying BHP into a single Australian-headquartered and Australian tax resident listed company

  • Following the South32 demerger, estimate that PLC now generates only 8.9% of BHP’s EBITDA but PLC accounts for 39.7% of BHP’s aggregate number of issued shares
  • Long-term misalignment of profits vs. shareholder base has led to a massive and continuing build-up of franking credits – totaling $9.7B or 10% of BHP’s market cap
  • Over the last 16 years since the completion of dual listing, PLC’s shares have traded at an average discount of 12.7% to Limited shares
    • Price dislocation stems from the economic asymmetry which in turn undermines the fundamental principles and objectives of the dual listing structure
  • Unification would:
    • Create a single Australian-headquartered and Australian tax resident unified BHP company which would be managed from Australia. That company could retain BHP’s current stock market listings and continue to be included within key FTSE and ASX stock indices
    • Put BHP’s Limited and PLC shareholders on the same footing, eliminate current trading value mismatch
    • Allow BHP to access the value represented by its existing massive $9.7B franking credit balance, plus future franking credits generated by the business
    • Significantly enhance the scope for, and optimize the impact of, BHP share buybacks – unified BHP’s management could return the substantial upcoming excess cash flow to shareholders by way of 14% discounted off-market share buybacks
    • Remove any need to use the Dividend Share Mechanism, thereby avoiding wastage of valuable franking credits
    • Help management to avoid making badly timed acquisitions paid for in cash, given the opportunity to deploy significant cash resources in value-enhancing post-unification share buybacks
    • Increase the scope for management to pursue appropriate acquisition opportunities using unified BHP’s own shares as consideration
    • Remove certain other material tax, operational and strategic inefficiencies caused by the dual listing structure

Step 2: Demerging and separately listing BHP’s US petroleum business

  • Based on commonly utilized valuation metrics for comparable businesses, the indicated value for BHP’s US petroleum business is $22B, which is well in excess of the current analyst consensus valuation for that business
  • Analysis indicates that US petroleum business has not been able to successfully contribute to shareholder value at BHP since:
    • It provides no meaningful diversification benefits to BHP as a whole
    • Lack of synergies between US petroleum business and its mining assets
    • Intrinsic value is being obscured by bundling it with BHP’s other assets
  • Demerger and separate listing of US petroleum assets on the NYSE would:
    • Unlock the intrinsic value of the US petroleum business and provide shareholders with access to what we believe would be a much higher market value for that business
    • Allow the demerged US petroleum business to be properly capitalized and pursue value-accretive strategic opportunities
    • Allow BHP’s management to fully focus on deriving value from BHP’s unrivalled portfolio of first-tier mineral assets
    • Allow BHP’s investors to tailor their own desired exposure to US energy and petroleum equities rather than being constrained by the fixed acreage composition and petroleum vs. minerals mix currently being offered by BHP

Step 3: Adopting a policy of consistent and optimized capital returns to shareholders

  • BHP is expected to generate $31B of excess cash flow in the next 5 years, assuming the current 50% payout ratio of net income
  • A clearly defined and communicated ongoing 14% discounted off-market buyback program undertaken by a unified Australian tax resident BHP which has demerged its US petroleum business would:
    • Enable BHP to pursue its own shares at a substantial discount, achieving an overall cost which is 5.6% lower than the price at which BHP can currently buy back its shares
    • Release up to 66% more franking credits to shareholders
    • Facilitate an initial off-market buyback of at least $6B
  • Within the 5 year period ending June 2022, in addition to the continuation of the current 50% payout ratio, adopting this capital return policy as part of the Value Unlock Plan could result in:
    • Total $33B being returned to shareholders via buybacks
    • 29% of core BHP’s share capital being repurchased
    • Total EPS accretion from buybacks of 33% in respect of the shares remaining in issue after the 14% discounted buyback program
    • An increase in BHP’s NAV of $20B (21% of current market cap)

Our analysis indicates that implementation of the Value Unlock Plan could provide BHP shareholders with an increase in the value attributable to their shareholdings of up to 48.6% (Limited Shareholders) / 51% (PLC Shareholders).

uplift from plan

Elliott Management Corporation manages two multi-strategy hedge funds which combined have more than $32B of AUM. Its flagship fund, Elliott Associates, L.P., was founded in 1977 by Paul Singer, making it one of the oldest hedge funds under continuous management. 

* Franking Credits (also known as Imputation Credits): Type of tax credit that allows Australian Companies to pass on tax paid at the company level to shareholders.  The benefits are these franking credits can be used to reduce income tax paid on dividends or potentially be received as a tax refund.

Image Source: Reuters
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