BHP Billiton’s London listing under fire
A long-standing BHP Billiton shareholder is against the miner’s new dividend-sharing proposal and expects a vote on it next month will trigger fresh debate on whether BHP should collapse its London listing.
Investors, particularly in Australia, continue to question the miner’s steadfast commitment to its policy to maintain or increase its $US6.6 billion dividend payment each year, known as its “progressive dividend” policy.
Brad Potter, head of Australian equities at Nikko Asset Management, said BHP’s progressive dividend policy was unsustainable, and a no vote for payment of dividends to Billiton from BHP at the miner’s upcoming annual meetings in November could be the catalyst that leads to the collapse of the dual-listed company (DLC) structure.
“The DLC is a relic, there is no need for it to exist,” Mr Potter told Fairfax Media.
A shareholder vote on BHP’s proposed dividend-share scheme at the annual meetings in London and Australia over the next month may “force the issue of collapsing the DLC”, he said.
This year BHP became Nikko Asset Management’s biggest underweight position (relative to the benchmark index) in its $1.2 billion Australian share wholesale fund, according to the latest fund update. Nikko’s Australian arm has about $23 billion in funds under management, which includes holdings in BHP.
One of the justifications for setting up the DLC, when BHP merged with Billiton in 2001, was that it would lower BHP’s cost of capital.
“It’s done the opposite, BHP’s cost of capital is arguably higher due to the DLC structure,” he said.
Investors point to ASX-listed Brambles’ dumping of its London Stock Exchange listing almost a decade ago as a good example of collapsing a DLC structure.
A spokesperson for BHP said its dual-listed structure “has worked and continues to serve shareholders well”.
“Our DLC has allowed all of our shareholders to share in the continued growth of China and the demand it has generated for our products,” BHP said.
“The DLC structure also provides direct access to two of the major global equity markets relevant resource companies.”
Following the spin-off of South32 earlier this year, there are no longer enough assets held in BHP’s British company to generate the income needed to pay British shareholders’ share, which is 40 per cent, of BHP’s $US6.6 billion ($9 million) progressive dividend.
The global miner will ask shareholders in its ASX-listed and British-listed companies to vote on a change to the way dividends are funded under its dual-listed company structure. Investors will be asked to approve payments to its British arm to cover the dividend payments for shares listed on the London Stock Exchange.
It is a clear sign that BHP remains wedded to its dual listing, and will mean BHP asks Australian shareholders to effectively sacrifice some of the company’s franking credits to allow it to meet its dividend requirements to its British shareholders. BHP doesn’t generate enough profits outside Australia to pay dividends to foreign shareholders.
Although BHP is not expected to face opposition in London at its annual meeting on Thursday, there could be some push-back from investors at its Australian annual meeting in a month in Perth.
Some Australian institutional investors could push to have the proposal changed.
“Why would Australian shareholders vote for a proposal that disadvantages them?” Mr Potter said.
However, early indications of shareholder voting preferences for the new dividend scheme appear positive, and BHP has said it is in the “best interests of all shareholders”.
Andy Forster, senior investment officer at top 20 BHP shareholder Argo Investments, says unwinding the DLC would be expensive and London-based shareholders are unlikely to vote in favour.
If shareholders failed to approve the transaction, BHP could still transfer its “distributable reserves” from Australia to Britain, but only if the British arm of BHP could not pay the dividend required.
“Such a transfer, without the amendment to company constitution would incur significant fiscal cost to all sets of shareholders,” Mr Forster said.
Mr Forster pointed to Rio’s use of a similar dividend mechanism but noted the iron ore giant had a much greater proportion of shareholders based in London. About 70 per cent of Rio’s shares are listed in Britain and the balance in Australia.
Mr Potter said BHP’s management had missed the opportunity to rebase the progressive dividend on spinning off South32.
BHP’s progressive dividend policy provides that it maintains or increases its dividend in US dollars at each half-year payment. BHP has not cut its dividend since 1988.
“The company is likely to be paying out well in excess of 100 per cent of earnings for the next few years, which makes no financial sense for a cyclical resources company,” Mr Potter said.
BHP’s 2001 merger with Billiton was arguably the “one of the worst corporate actions in recent Australian history as it resulted in a massive amount of shareholder wealth destruction”, he said.
Nikko AM voted against it at the time because “BHP was giving away 40 per cent of the company for assets that were of questionable quality”.
“The assets generated very little in earnings during the mining boom and now largely are not part of BHP’s suite of assets. This is plainly reinforced by Billiton in the UK not being able to fund its distribution due to a lack of earnings.”
However, the BHP view remains that the merger was a success.