BHP finally decides to disentangle a complex structure

Amid the flurry of announcements emanating from BHP late on Tuesday afternoon was one announcing the unwinding of the controversial dual-listed company structure that 20 years ago stapled BHP and Billiton and their shareholder bases together.

From the Australian-listed BHP Ltd’s perspective, the structure has outlived its usefulness – a conclusion reinforced by the flow-on effects of the proposed merging of its petroleum business with Woodside.

For shareholders of the UK-listed BHP Plc and the British market at large, the announcement will generate a mixed reaction, with the likelihood that Plc shares will rise in the near term offset by the reality that Britain is losing one of the biggest companies, if not the biggest, listed on its stockmarket and that many UK institutional shareholders will no longer be able to hold shares in the new streamlined BHP.

BHP’s dual-listed company structure has become an anachronism.Credit:Will Willitts

It is inarguable that circumstances have changed since BHP scorned a proposal from US activist investor Elliott Management to unify the twin entities by backing them into a single UK-listed and domiciled company.

While that 2017 proposal evolved as Elliott realised shifting the domicile was never going to be contemplated by BHP or allowed by an Australian government, BHP’s key argument was that it would cost too much (between $US1.3 billion and $US3 billion), undermine the efficient use of its vast hoard of franking credits and make its shares less attractive to some groups of shareholders, with others unable to retain them because of their investment mandates.

While BHP has continually reviewed the usefulness of the dual-listed structure, it has consistently held the view that the benefits of unwinding it weren’t worth the cost and effort and that the company had greater priorities. Much has changed, however, over the four years since the Elliott campaign.

The most significant was the dissolution of a Singaporean marketing joint venture last year, under pressure from the Australian Taxation Office, that generated substantial tax benefits.

The other was the running down, and eventual writedown this year of the value of BHP’s Mt Arthur coal mine in NSW and the tax losses – once as much as $US650 million – linked to the mine. Mt Arthur is now up for sale.

But even before the Elliott campaign, the continued usefulness of the dual-listed company structure had been questioned.

When it was formed for the merger of BHP and Billiton in 2001, it was done for three broad sets of reasons.
One was to avoid what would otherwise have been significant tax events for the companies and their shareholders; another was to minimise the “flow back” of shares into the market from shareholders in the South African but UK-listed Billiton unable to invest in an Australian-listed entity; and the third was to create a vehicle for streaming BHP’s valuable franking credits to the Australian shareholders for whom they had value.

That streaming of the credits was possible while the UK entity had sufficient earnings and retained earnings to pay equivalent dividends to those declared by BHP Ltd.

The dissolution of the dual-listed company structure has gone from ‘nice to do’ to ‘let’s do it’.

When almost all the Billiton assets were spun off to create South 32, however, there weren’t sufficient profits within Plc to cover the dividends. Plc now generates only about 5 per cent of the DLC’s earnings, but BHP will distribute 89 per cent of this financial year’s earnings to shareholders in its two entities.

The South 32 demerger forced BHP Ltd to transfer earnings, via a dividend that carried with it Australian franking credits of no value to non-Australian shareholders, effectively destroying BHP’s ability to use the credits efficiently and undermining the rare ability the structure once had to stream them.

The proposed Woodside deal encapsulates the mounting problem BHP has been confronting.

Let’s say BHP Petroleum is valued by the transaction at about $US13.5 billion (it could be higher, depending on how Woodside shares are trading).

When the transaction is effected, the Woodside scrip or their equivalent value will be distributed to all BHP shareholders, which means 40 per cent of them will go to shareholders in the UK entity, taking with them about $US5.4 billion of valuable franking credits that have no value to Plc shareholders.

That underscores how the dissolution of the dual-listed company structure has gone from “nice to do” to “let’s do it”.

The cost of unifying the corporate structure has been reduced by the removal of the tax obstacles from as much as $US3 billion to “only” $US400 million to $US500 million, reducing, if not entirely removing, the main rationale for deferring the decision.

The demerging of petroleum, the planned offloading of BHP’s thermal and lesser-quality metallurgical coal assets and the go-ahead for the Jansen potash project in Canada will leave BHP a different and smaller company, less diversified and more reliant on iron ore and copper.

With net debt of only $US4.1 billion (its target range before the deal with Woodside was $US12 billion to $US17 billion) and a somewhat imbalanced portfolio BHP will have the capacity, and arguably the need, to invest or acquire on a large scale.

With the dual-listed company structure, it is difficult for BHP to use its own scrip in an acquisition because it has to treat shareholders in each entity equally. When it spun out South 32 it had to give the British shareholders value equivalent to that received by the Australian Ltd shareholders.

There might be some tax benefits, for instance, for shareholders in a US-domiciled company targeted by BHP in using Ltd scrip rather than cash, which is more easily and efficiently done with a conventional corporate structure.

That’s illustrative, but there is no doubt that a simplified structure and primary listing would make it less complicated and more efficient to make the acquisitions that appear probable once petroleum and coal have disappeared from the portfolio. It would create options that were easier exercised.

The UK, which has historically provided the core of the capital that developed the Australian mining industry and miners, will feel like it is losing out when BHP is removed from the FTSE 100 and becomes just another foreign company with a secondary listing on the UK boards.

In the near term, however, Plc shareholders should get something of a bonus from an uplift in their share price. Plc shares rose about 3.4 per cent in response to the spate of BHP announcements.

Historically, Plc shares have traded at a discount to Ltd’s, generally in a range between about 10 per cent and 14 per cent.

Different tax and listing rules and corporate laws might be part of the explanation for the discount, although a more material factor might be the greater liquidity in Ltd’s shares derived from its 60 per cent share of the dual-listed company structure and the comfort provided by its ownership of 95 per cent of the operations.

The discount for Plc shares relative to Ltd’s had blown out ahead of Tuesday’s announcements to as much as 21 per cent, so unification and the swapping of Plc scrip for Ltd scrip ought to close out that discount and provide some compensation to the UK shareholders for the loss of the influence the structure – which required the approval of both sets of shareholders for anything meaningful – has conferred.

In some respects, it will be sad to see what was a very creative and effective structure when it was created two decades ago dissolved. But the changing nature of BHP since 2001 and the next wave that will flow from Tuesday’s announcements meant that a structure that once generated efficiencies will soon be highly inefficient.

For BHP, the dual-listed company structure has finally become an anachronism.

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