Elliot Management – The BHP Shareholder Value Unlock Plan

Elliot Management’s presentation on BHP Billiton.

Executive summary

The BHP Shareholder Value Unlock Plan

• BHP is a leading global resources company with a first-class portfolio of assets
• Unfortunately, despite the progressive and successful demerger of South32, total shareholder returns at BHP have remained depressed because BHP’s management cannot deliver optimal shareholder value without:
  • Resolving the inefficiencies caused by its dual-listed company (DLC) structure;
  • Monetizing the intrinsic value of BHP’s US petroleum business, the value of which is obscured by its continued inclusion within the group, without providing any demonstrable diversification benefit for BHP; and
  • Enhancing capital management to an optimal level
• The BHP Shareholder Value Unlock Plan (the “Value Unlock Plan”) is designed to provide management with the opportunity to directly address these issues, by:

I.Unifying BHP into a single Australian-headquartered and Australian tax resident listed company

• Shareholder returns could be significantly enhanced by unifying the DLC group structure into a single Australian-headquartered and Australian tax resident company which would continue to be managed from Australia and which could retain BHP’s current stock market listings and continue to be included within key FTSE and ASX stock indices
• Unification would (i) put BHP’s Ltd and Plc shareholders on the same footing, eliminating the current trading value mismatch between the two lines of shares; (ii) remove certain material tax, operational and strategic inefficiencies caused by the DLC structure; (iii) significantly enhance the scope for, and optimize the value impact of, BHP share buybacks; and (iv) give BHP much greater access to its existing US$9.7bn franking credit balance, plus future franking credits

II.Demerging and separately listing BHP’s US petroleum business

• A demerger and separate listing of BHP’s US onshore and Gulf of Mexico petroleum assets on the NYSE would (i) provide shareholders with access to what we believe would be a much higher market value for that business; (ii) put the demerged business in a position to benefit from further operational improvements and strategic corporate activities; and (iii) allow BHP’s management and investors to fully focus on the value of core BHP’s unrivalled portfolio of first-tier mineral assets

III. Adopting a policy of consistent and optimal capital return to BHP’s shareholders

• BHP can retain an “A” grade credit rating whilst using its substantial excess cashflows to deliver enhanced shareholder returns, by way of repurchasing shares at an attractive discount to market price, in a clearly-defined and communicated ongoing off-market share buyback program – in addition to continuing the current 50% dividend payout ratio
• The adoption of this policy would help to avoid any repetition of prior tendencies to make value-destructive large-scale acquisitions for cash

Our analysis shows that implementation of the Value Unlock Plan could provide BHP shareholders with an increase in value attributable to their shareholdings of up to c.48.6% (Ltd shareholders) / c.51.0% (Plc shareholders)

Our in-depth analysis of BHP’s DLC structure and its business and assets, and the formulation of the Value Unlock Plan for BHP, has been undertaken with the benefit of extensive professional analysis and advice and other relevant input, including on the tax, accounting, legal, stock exchange, commercial, equity and other shareholder aspects of the Value Unlock Plan, covering not only Australia and the UK but also, among others, the US, Chile, Peru and South Africa

BHP – a first-class portfolio, which is failing to deliver optimal value for shareholders

A first-class portfolio of assets

BHP has a portfolio of best-in-class large-scale diversified mining and petroleum assets

Demerging South32 – a case study for future value release

• In demerging South32, BHP’s management took an important first step towards streamlining BHP’s portfolio, releasing value for BHP’s shareholders and enhancing BHP’s focus on a smaller number of mostly core assets as a means of unlocking shareholder value
• The total shareholder returns for South32’s shareholders has significantly outperformed the total shareholder returns for BHP’s shareholders as in under two years an independent South 32 has been able to:
  1. drive asset operational costs lower;
  2. announce an appropriate value-enhancing acquisition; and
  3. unlock shareholder value – announcing a c.US$500m share buyback program (equivalent to c.4.3% of South32’s current market capitalization) over an expected 12 month period
• Unification of BHP’s DLC structure and the demerger of BHP’s US petroleum business(2) would be the logical next step for BHP’s management to take, in order to:
  • Remove existing DLC inefficiencies which have been magnified by the South32 demerger
  • Unlock the true value of the US petroleum business and increase BHP’s focus on its core Tier-1 mineral assets such as Pilbara, Escondida and Queensland coal
  • Significantly enhance the scope for, and optimize the value impact of, an ongoing discounted off-market share buyback program
• We see the incomplete status of the streamlining and transformation of BHP’s group structure and asset portfolio as the key reason for BHP’s underperformance in terms of total shareholder returns

Unfortunately, underperformance is part of a continuing trend

Despite the quality of BHP’s assets, BHP has underperformed a portfolio of comparable mineral and petroleum companies over a variety of time periods

See the full presentation below.