Ask the right question and maybe you will get the correct answer.
And if you are a local shareholder in BHP Billiton, figuring out whether the shares you hold trade at a premium, or a discount, to their London traded counterpart is fundamental to deciding whether you should back any push to collapse the dual-listed company structure, with separate shares listed in the Australian and London markets.
Late on Monday, investment funds associated with US activist investor Paul Singer went public with a proposal to prod global miner BHP Billiton to collapse its dual company structure as well as spin-out its US petroleum assets.
BHP immediately ruled it out, saying it has looked at making the move but costs would outweigh the benefits, and the idea was greeted coolly by analysts, who mostly doubted just how much better off shareholders would be if the reorganisation was implemented.
Dubbed the “value unlock plan”, Elliott Advisors which claims to speak for as much as 4.1 per cent of the capital of BHP’s British-listed arm, would collapse the miner’s dual company structure into a single Australian-headquartered entity with its primary listing on the London Stock Exchange with Australian investors to receive a CHESS depositary interest.
The proposal is aimed at retaining index inclusion in the two markets, which is important to retaining sharemarket valuations.
But if the proposal was implemented, would offshore investors gain access to the premium BHP shares trade in Australia or would Australian investors end up seeing the shares trade at the discount BHP shares are accorded in London?
Or as Macquarie asked in a research note: Does the British stock trade at a discount or the Australian stock trade at a premium?
The common view is that the premium accorded BHP shares traded on the ASX stems from the benefit of franking credits.
“There is the real risk in our view that a combined single listed entity could trade towards the UK multiples rather than maintain the Australian multiples,” the broker warned clients.
Over the past two years, BHP shares traded in Britain have traded at a 15 per cent discount to the Australian-traded shares. The ASX200 trades on a price-earnings multiple of around 16.3 times, analysts said, which is significantly higher than the multiple of 14.5 times shares included in the FTSE100 index trade at.
The limited spread of investible assets available through the ASX, with a bias towards financial services and mining stocks, along with the broadly higher dividends paid by public companies in Australia when compared with offshore markets due to their maturer status are often mentioned as reasons why multiples are higher on the main ASX indices.
The other element of the Elliott Advisors proposal, BHP spinning out its US petroleum assets into a separate entity to be listed on the New York stock exchange, won broader support from analysts, although whether this would be beneficial to shareholders would depend on the level of debt the entity would be loaded up with if the plan were to proceed.
Group-wide, BHP’s net debt stood at around $US20 billion at the end of December which is expected to decline to around $US15 billion by mid-year, thanks to strong commodity prices, iron ore and coal in particular.
“The level of debt ascribed to the petroleum division is critical in valuing a demerger option, particularly given we only expect the US petroleum assets to consume all cash generated for the next eight years,” Macquarie told clients.