Summary: BHP Billiton has failed to understand the needs of its London-based institutional investors with its decision to only list the spin-off company in Australia and South Africa. This, along with the absence of a share buyback, falling commodity prices and increasing unease over the timing of the split, has resulted in a slide to the share price since mid-August.
Key take-out: Without a sustained share price recovery, it’s likely BHP will come under heavy questioning for its plans to split its operations at next month’s annual meeting in London.
Key beneficiaries: General investors. Category: Shares.
One mistake might not derail BHP Billiton’s plan to split, but failing to understand the needs of its London-based institutional investors will create an opening for critics to question whether the plan is as good as management claims – or that management is as good as has been promoted.
For BHP Billiton managing director, Andrew Mackenzie, the London oversight represents his first significant public mistake, and while he can blame advisers the buck stops on his desk.
Whether deliberate or accidental the decision to only list the spin-off company in Australia and South Africa meant that some London-based investors would not be allowed to own shares in the new company because their investment mandate is limited to major markets such as those in Europe and North America.
Without a London listing, similar to that which BHP Billiton now has, some institutions would be forced to sell their entitlement in the spin-off company and, judging by recent share price moves among the major miners, they might have already sold some of their BHP Billiton shares.
Omitting a London listing in the original plan for the new company being created by BHP Billiton to hold a bundle of its non-core assets might seem to be a minor oversight and, even if corrected, which seems likely, it has opened the door for a closer examination of the split’s benefits.
The major issue, which could be a topic raised at the company’s annual meeting in London on October 23, is whether BHP Billiton is being unnecessarily weakened at a time of low commodity prices by the spin-off.
As the plan now stands the new company, which is yet to be named, will contain an assortment of aluminium, coal, manganese and nickel assets, leaving the parent company with four big operating divisions: iron ore, oil and gas, metallurgical coal, and copper, with a fifth potential division, potash, still in the planning stages (see my article The BHP split).
Emboldened by what seems to be a successful challenge to the London omission for the listing of the spin-off company, some investors might also ask whether it’s wise to weaken the parent at a time when most of its divisions are being hit by falling commodity prices, with iron ore and oil joining coal in the sin bin.
A measure of the uneasiness about the plan to split BHP Billiton, as well as concern about future profitability and the absence of a share buy-back or capital return, can be seen in the company’s share price which has dropped by 12.7% since the spin-off was announced on August 19.
That share price fall is more than double the 5% decline in the all ordinaries index over the same time and substantially more than the 8.8% fall in the price of arch-rival, Rio Tinto, and more than double the 5% decline by another big diversified miner, London-listed Glencore.
It is not possible to attribute all the blame for BHP Billiton’s exceptional share price fall, compared with its rivals, on the London omission, but it has probably been a factor and is likely to be used to question the rest of the spin-off plan despite its benefits (see Robert Gottliebsen’s Transforming BHP).
Apart from failing to understand the investment mandates of some of its major shareholders it is likely that BHP Billiton has been sold off because it is the only big miner with heavy exposure to oil and because it is seen as being less investor-friendly than its rivals.
Glencore, for example, has pleased its largely London audience by announcing a $1 billion share buy-back, beating BHP Billiton and Rio Tinto which have also promised some form of capital management but are yet to reveal when, or how much.
Falling commodity prices, especially for iron ore, coal and oil, could further delay buy-back or capital return programs by BHP Billiton and Rio Tinto.
Low commodity prices are starting to weigh on the investment recommendations of leading investment banks with the latest crop of BHP Billiton share tips including a rare underperform (or sell) from Credit Suisse last week, and a pair of neutral ratings from Macquarie and JP Morgan.
The collapse in the iron ore price is the major reason for the Credit Suisse downgrade which said that it expects any capital management program to be delayed to the 2017 financial year.
Rio Tinto, which has a far greater exposure to iron ore than BHP Billiton, does not get the same treatment from Credit Suisse. It remains on the outperform (buy) list of the investment bank.
What might be happening with BHP Billiton is that investment banks and institutional investors are starting to reassess the wisdom of splitting the company at a tricky time in the commodity-price cycle – just as they have with a similar plan by AngloGold Ashanti.
It was pressure from investors which forced AngloGold Ashanti, one of the world’s biggest goldminers, to abandon a split plan earlier this month, just a few days after it was announced.
As well as questioning the judgement of management there is also likely to be deeper analysis into the operating divisions earmarked for retention by BHP Billiton, with three of the four divisions under financial pressure and unlikely to hit their profit targets.
Iron ore, for example, will certainly be feeling a squeeze and, while still very profitable thanks to its ultra-low costs, profit in the current financial year is highly likely to be down substantially on last year.
Metallurgical coal has also been hit by falling demand from Asian steel mills while profit from oil and gas will be squeezed by a global energy glut. Copper, thanks to its price holding above $US3 a pound, should be delivering reasonable profits.
However, what stands out more than anything else is the apparent lack of investor support for BHP Billiton since that August 19 split announcement and the initial omission of a London listing for the spin-off company.
Without a sustained share-price recovery it would not be surprising for BHP Billiton’s split plan to come in for some close questioning at next month’s annual meeting in London.