While presentations about plans to shake up public companies from activists like Bill Ackman (Trades, Portfolio) and David Einhorn (Trades, Portfolio) have slowed, Paul Singer (Trades, Portfolio) has taken the offensive on his fourth company in six months, sending a three-point plan to unlock value to the board of BHP Billiton Plc (BHP, Financial) on Monday.
“Despite being a leading global resources company with a portfolio of best-in-class large-scale diversified mining assets, in recent years BHP as an investment has underperformed a portfolio of comparable mineral and petroleum companies,” Singer said in the letter.
Shares of the Australian natural resources company soared 3.46% Monday to the high end of their 52-week range as Singer’s $31 billion hedge fund Elliott Management disclosed a 4.1% holding and promise to increase shareholder value by around 50%. The move comes on the heels other campaigns he has waged since November at Marathon Petroleum Corp. (MPC, Financial), Arconic (ARNC, Financial), Cognizant (CTSH, Financial) and Advisory Board Co. (ABCO, Financial).
Singer’s plan for BHP is to separate and list its $22 billion U.S. petroleum business, which accounts for 18% of its revenue as its smallest natural resources segment behind coal, copper and iron ore. The segment saw crude oil prices rise in the first half of 2017 triggered by OPEC’s agreement to its first production cut since 2008 and improved fundamentals, the company said in its first-half release, and expected further stabilization.
The oil business untethered from the company would fetch a higher market value and allow it to seek value-enhancing strategic acquisitions, Singer said.
Further, Singer wants to unify the company’s DLC structure, which allows two companies to function as one but list separately, to create one company domiciled in the U.K. with listings on the London and Australian exchanges.
“One key aspect of management's inability to deliver optimal value for BHP's shareholders is that the DLC structure has led to a massive build-up of franking credits[7] at Limited,” Elliott Management wrote, saying the $9.7 billion in tax credits can only be passed on to shareholders by undoing its DLC structure.
Singer also accused the management of making poor acquisitions with its billions of dollars in free cash flow, saying it should instead return $33 billion to shareholders by repurchasing shares off-market at a 14% discount after the unification.
BHP Billiton fired back a response to Elliott early Monday morning, saying it had discussions with Elliott over many months and decided the “associated risks of Elliott’s proposal would significantly outweigh any benefits.”
BHP commented on all three parts of Elliott’s plan, saying DLC structure would not have enough benefits to outweigh the costs and that there was also no evidence the unit was trading at a discount to its peers. The company also said it had returned $23 billion in buybacks and $56 billion in dividends to shareholders since it formed the DLC structure in 2001.
In place of Elliott’s plan, CHP Billiton said it would focus on value creation, cash returns and balance sheet strength to grow in value.
“The Board of BHP Billiton will consider further its detailed response to the proposal and will make a further announcement in due course,” BHP said.
