BHP UNIFICATION – GOOD OR BAD?BHP Unification. If it was that clear we wouldn't be writing about it. So, let's explain. First of all - WHY IS IT HAPPENING There is a lot of fluff about changing the structure to provide a simpler and more agile company but that’s the marketing.
The real reasons include:
- Because as a common courtesy, as often happens on a merger, when BHP merged with the UK listed Billiton PLC in 2001 the management egos and shareholder base of Billiton required their own UK listing to enable some continuity of investment structure and index relevance in the UK (and Johannesburg).
- At that time the Billiton entity accounted for 40% of total earnings. But since the demerger of the South32 assets into a separate structure and with the growth in the relevance of the Australian iron ore business the ‘Billiton’ earnings (UK earnings) only account for about 5% of BHP Billiton’s earnings now.
- BHP PLC shareholders have complained about the structure because the PLC shares have traded at a significant discount to the ASX listed shares (partly to do with the lack of franking for UK shareholders). They want the structure gone which should in theory see their UK shares re- valued in line with the Australian shares.
- And it has worked – here is the chart of BHPPLC (listed in the UK) relative to BHP Group Ltd (listed on the ASX) showing a sharp short term improvement in the performance of the PLC listed shares compared to the ASX listed shares.
- The main advocate for change has been the US hedge fund shareholder Elliott Management who are now a vocal advocate for the change in dual-listing structure. Elliott is an ‘activist’ shareholder that bought 4% of BHP PLC in 2017 and started to attack BHP for its structure, lack of handouts and strategy. Elliott have attacked many companies in the past looking to extract value (Alcoa). The founder has turned a seed of $1.3m borrowed from friends and family in 1977 into funds under management of US$73bn with just 14 clients. Biggest holding is Dell.
- Another reason to get rid of the PLC listing is that the stock market exists to raise capital. If BHP needed to raise capital (its making so much cash it doesn’t) it is almost certainly going to need it for the Australian end of the business not the UK end so the UK listing becomes less useful.
SO WHAT HAPPENS NOW
- After voting it through last week the BHP Unification takes effect on Monday 31st January.
- BHP Billiton PLC ceases to exist.
- All London and Johannesburg shareholders get ASX listed (BHP Group Ltd) shares as of Monday on a 1:1 basis.
- BHP Group Ltd (the ASX listed company) is the only listed entity from Monday but it will still have listings in the UK and US and other exchanges, but they will represent the ASX domiciled company not the UK domiciled company.
- Nothing changes at a company level – same management, same economic outcomes just a different legal structure.
- BHP Group Ltd moves from about 6.6% of the ASX 200 (and other indices accordingly) to about 10.9% (everyone’s quoting 10%) of the ASX 200.
- BHP Group Ltd becomes the biggest stock in the Australian indices.
- Passive, indexed, benchmark conscious fund managers and Exchange Traded Funds will have to buy more BHP Group Ltd shares to increase their weightings in line with their benchmarks/indices - around $4bn worth in Australia. This includes domestic and international institutions benchmarked to the MSCI indices that include Australia and by implication, BHP.
- BHP Group PLC drops out of the LSE and JSE indices (FTSE 100 benchmark most obviously) and as such the UK passive, indexed, benchmark conscious fund managers and Exchange Traded Funds will have to sell BHP Group Ltd shares to decrease their weightings in line with their benchmarks/indices which now don’t include BHP.
- This is why the short position in BHP Group Ltd shares has spiked as the mostly UK institutions anticipated getting handed BHP Group Ltd stock (ASX listed) and anticipated the need to sell BHP Group Ltd (the ASX stock) when it dropped out of the LSE indices. So they started shorting BHP in Australia to avoid the ‘stampede’ out of the BHP Group Ltd stock when they were handed them in place of BHP Group PLC shares.
- BHP is (amazingly – but this will explain it) the 4th most shorted stock in Australia with 10.07% shorted up from 4% prior to the announcement that the dual listed structure would end. This is a chart of the short position in BHP in Australia over the last three years. This is because some PLC shareholders (and general arbitrageurs) have effectively chosen to sell ASX listed shares early hoping to benefit from the value change of PLC (up) relative to ASX listed (down). PLC shareholders will replace the short positions by selling their ASX stock when they get it.