Head of Research, IPOs & Placements, Aequitas Research

Sumeet Singh

Head of Research, IPOs & Placements

IPOs and Placements coverage across Asia Pacific

Aequitas Research

We cover all listing across the Asia Pacific along with follow-up placements. As of Dec 2020, our team had covered 539 IPOs with a hit rate of 73.5% and 685 placements with a hit rate of 66.8%.

We combine fundamental bottom-up views with our proprietary quantitative framework to provide a holistic coverage across new listings and placements. Our coverage includes pre-IPO notes before the deal is launched, follow-up analysis once the deal is live and post-listing trading analysis as well.

Equity Capital Markets

APM Human Services / Equity Capital Markets

<p>APM, an international human services provider, aims to raise around US$730m via a mix of selling primary and secondary shares in its Australian IPO. APM runs 800 sites spanning 10 countries with its largest market being Australia. </p><p>In FY21, APM supported over one million individuals which included 600,000 jobseekers; 180,000 people with disabilities; 100,000 people with mental health needs; 50,000 offenders and ex-offenders; and 30,000 veterans. APM’s main services include: Employment services, Health and Wellbeing, Communities and Assessment and Disability and Aged care support services. </p><p>Its revenue grew by 49% YoY in FY20 and was up another 28% in FY21 and is expected to grow by 31% in FY22. Its EBITDA and NPATA growth have been even stronger with EBITDA growing at 50%+ each year while NPATA has more than doubled in each of the past two years. Going forward, APM expects its revenue to grow by 31% YoY in FY22, with services margin growing by 27.7% YoY, EBITDA by 26% and NPATA by 20.7% YoY.</p><p>However, most of the past growth has been driven by M&amp;A and the company hasn’t been very forthcoming with data disclosures. Moreover, both of its largest contracts are due for an overhaul in 2022-23 which could impact its earnings.</p>

APM, an international human services provider, aims to raise around US$730m via a mix of selling primary and secondary shares in its Australian IPO. APM runs 800 sites spanning 10 countries with its largest market being Australia. In FY21, APM supported over one million individuals which included 600,000 jobseekers; 180,000 people with disabilities; 100,000 people with mental health needs; 50,000 offenders and ex-offenders; and 30,000 veterans. APM’s main services include: Employment services, Health and Wellbeing, Communities and Assessment and Disability and Aged care support services. Its revenue grew by 49% YoY in FY20 and was up another 28% in FY21 and is expected to grow by 31% in FY22. Its EBITDA and NPATA growth have been even stronger with EBITDA growing at 50%+ each year while NPATA has more than doubled in each of the past two years. Going forward, APM expects its revenue to grow by 31% YoY in FY22, with services margin growing by 27.7% YoY, EBITDA by 26% and NPATA by 20.7% YoY.However, most of the past growth has been driven by M&amp;A and the company hasn’t been very forthcoming with data disclosures. Moreover, both of its largest contracts are due for an overhaul in 2022-23 which could impact its earnings.

APM Human Services IPO - Strong past Growth but Has Ample Unhappy Employees and Clients

European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

<div>
<p>Discounts to NAV for our selected European holdcos and DLCs have generally tightened during September.</p>
</div>
<p>The report incorporates several SOTP valuations.</p>
<div>
<ul style="list-style-type: disc;">
<li>
<p>Following the (logical) decision to collapse the DLC, the premium of <a href="https://www.smartkarma.com/entities/bhp-group-ltd" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Group (BHP AU)</a> vs.  <a href="https://www.smartkarma.com/entities/bhp-billiton-plc" target="_blank" data-smartkarma-citation="entities:21840:1" rel="noopener">Bhp Billiton (BLT LN)</a> tightened and at close of September was <strong>6.9%</strong>, against a 10-year average of 14.7%. It is a very decent spread in my view to put on a trade. <strong>Long </strong><strong>UK plc / short Aussie Ltd through the US listings</strong>.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/corp-financiera-alba-sa" target="_blank" data-smartkarma-citation="entities:21245:1" rel="noopener">Corp Financiera Alba Sa (ALB SM)</a> is trading at a 40.9% discount to NAV (down from 42.3% at the end of June and 47.9% at the end of February). <a href="https://www.smartkarma.com/entities/naturgy-energy-group-sa" target="_blank" data-smartkarma-citation="entities:21271:1" rel="noopener">Naturgy Energy Group SA (NTGY SM)</a>, one of its main assets, is the object of a partial takeover bid. <strong>Alba</strong> has some quality assets ion  a diversified portfolio and <strong>is fundamentally cheap</strong>, in my view.</p>
</li>
<li>
<p>The discount to NAV of <a href="https://www.smartkarma.com/entities/groupe-bruxelles-lambert-sa" target="_blank" data-smartkarma-citation="entities:21332:1" rel="noopener">Groupe Bruxelles Lambert Sa (GBLB BB)</a> has tightened slightly to 31.3%. There are no catalysts in sight and the discount stubbornly keeps above 30%. <strong>Long GBL / Short main listed assets</strong> (LafargeHolcim, SGS, Pernod Ricard, Adidas and Umicore, which represent 69.4% of NAV).</p>
</li>
<li>
<p>The discount in Heineken Holdings relative to Heineken has widened to 16.6% (vs. 14.4% at the end of April) vs. an average of 10.5% for the last 15 years, and 7.9% for the last five years. Recommendation is long Heineken Holdings, short Heineken, and close as soon as it tightens a 2-3%. The upwards trends seems clear by now, and it is not easy to call the top.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/industrivarden-ab" target="_blank" data-smartkarma-citation="entities:22395:1" rel="noopener">Industrivarden AB (INDUA SS)</a> C shares are trading at a 7.9% discount to NAV (vs. a 1.1% premium to NAV at the end of June). An unusual situation has finally reverted. The average discount for the last five years for the C shares has been 11.5%.</p>
</li>
<li>
<p>The <strong>discount to NAV</strong> of <a href="https://www.smartkarma.com/entities/investor-ab" target="_blank" data-smartkarma-citation="entities:22397:1" rel="noopener">Investor AB (INVEB SS)</a> B shares has <strong>widened to 15.4%</strong> as of 1 October.</p>
</li>
<li>
<p>From my SOTP valuation, <a href="https://www.smartkarma.com/entities/kinnevik-ab" target="_blank" data-smartkarma-citation="entities:22407:1" rel="noopener">Investment Ab Kinnevik (KINVB SS)</a> B shares traded at an 13% premium to NAV at the end of September (vs a 1.6% discount at the end of February). A shares are trading at a c. 21.2% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. Post the Zalando distribution (together with the Millicom distribution), Kinnevik will transform itself in a listed VC, investing mainly in tech. I find it difficult to justify the current premium to NAV. If anything, I would go <strong>long listed assets/short Kinnevik B</strong>.</p>
</li>
<li>
<p>The <strong>premium</strong> of <a href="https://www.smartkarma.com/entities/rio-tinto-ltd" target="_blank" data-smartkarma-citation="entities:13:1" rel="noopener">Rio Tinto Ltd (RIO AU)</a> vs. <a href="https://www.smartkarma.com/entities/rio-tinto-plc" target="_blank" data-smartkarma-citation="entities:22114:1" rel="noopener">Rio Tinto PLC (RIO LN)</a> has tightened and at the end of September was <strong>9.4%</strong>, against a 10-year average of 15.6%.</p>
</li>
<li>
<p><a href="https://www.smartkarma.com/entities/royal-dutch-shell-plc-98de2c77-62f2-46da-88eb-af269fb53d42" target="_blank" data-smartkarma-citation="entities:28510:1" rel="noopener">Royal Dutch Shell PLC (RDS/B US)</a> “B” shares closed in June in New York at a <strong>discount</strong> of <strong>0.7%</strong> (vs. 5.8% as of end of April) with respect to the <a href="https://www.smartkarma.com/entities/royal-dutch-shell-plc-adr" target="_blank" data-smartkarma-citation="entities:792:1" rel="noopener">Royal Dutch Shell Plc (Adr) (RDS/A US)</a> “A” shares.</p>
</li>
</ul>
</div>


Discounts to NAV for our selected European holdcos and DLCs have generally tightened during September.

The report incorporates several SOTP valuations.



Following the (logical) decision to collapse the DLC, the premium of BHP Group (BHP AU) vs.  Bhp Billiton (BLT LN) tightened and at close of September was 6.9%, against a 10-year average of 14.7%. It is a very decent spread in my view to put on a trade. Long UK plc / short Aussie Ltd through the US listings.


Corp Financiera Alba Sa (ALB SM) is trading at a 40.9% discount to NAV (down from 42.3% at the end of June and 47.9% at the end of February). Naturgy Energy Group SA (NTGY SM), one of its main assets, is the object of a partial takeover bid. Alba has some quality assets ion  a diversified portfolio and is fundamentally cheap, in my view.


The discount to NAV of Groupe Bruxelles Lambert Sa (GBLB BB) has tightened slightly to 31.3%. There are no catalysts in sight and the discount stubbornly keeps above 30%. Long GBL / Short main listed assets (LafargeHolcim, SGS, Pernod Ricard, Adidas and Umicore, which represent 69.4% of NAV).


The discount in Heineken Holdings relative to Heineken has widened to 16.6% (vs. 14.4% at the end of April) vs. an average of 10.5% for the last 15 years, and 7.9% for the last five years. Recommendation is long Heineken Holdings, short Heineken, and close as soon as it tightens a 2-3%. The upwards trends seems clear by now, and it is not easy to call the top.


Industrivarden AB (INDUA SS) C shares are trading at a 7.9% discount to NAV (vs. a 1.1% premium to NAV at the end of June). An unusual situation has finally reverted. The average discount for the last five years for the C shares has been 11.5%.


The discount to NAV of Investor AB (INVEB SS) B shares has widened to 15.4% as of 1 October.


From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) B shares traded at an 13% premium to NAV at the end of September (vs a 1.6% discount at the end of February). A shares are trading at a c. 21.2% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. Post the Zalando distribution (together with the Millicom distribution), Kinnevik will transform itself in a listed VC, investing mainly in tech. I find it difficult to justify the current premium to NAV. If anything, I would go long listed assets/short Kinnevik B.


The premium of Rio Tinto Ltd (RIO AU) vs. Rio Tinto PLC (RIO LN) has tightened and at the end of September was 9.4%, against a 10-year average of 15.6%.


Royal Dutch Shell PLC (RDS/B US) “B” shares closed in June in New York at a discount of 0.7% (vs. 5.8% as of end of April) with respect to the Royal Dutch Shell Plc (Adr) (RDS/A US) “A” shares.




Selected European Holdcos and DLCs: September Report

Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

<p>On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was <a href="https://www.asx.com.au/asxpdf/20210903/pdf/4504qbggnhgyc0.pdf" target="_blank" rel="noopener">announced</a>. </p><p>The ratio of <a href="https://www.smartkarma.com/entities/milton-corp-ltd" target="_blank" data-smartkarma-citation="entities:29090:1" rel="noopener">Milton Corp Ltd (MLT AU)</a> shares to <a href="https://www.smartkarma.com/entities/washington-h-soul-pattinson-and-co-ltd" target="_blank" data-smartkarma-citation="entities:6054:1" rel="noopener">Washington H. Soul Pattinson and Co. Ltd (SOL AU)</a> shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share.</p><p>Those who have been following on my model would have the NAV at A$5.622 on 2 Sep at the close, or A$5.702/share including the A$0.08 of dividend which went ex- on August 31. That delivered me a number of 0.1864 but they started with A$5.70 rather than A$5.702.</p><section class="figure"><figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/227/647/original/Screenshot+2021-09-03+at+12.18.13+PM.png?1630642709" class="editor-image img-responsive" data-smartkarma-image-id="227647"></figure></section><p>As reported in the <a href="https://www.afr.com/street-talk/milton-corp-s-4b-takeover-finds-proxy-firm-support-20210901-p58ntx" target="_blank" rel="noopener">AFR</a>, both major proxy services came out in favor of the deal saying advantages outweighed disadvantages, and noting the IE's "fair value" range said pricing was appropriate; in a good quote from the article, "there were no stones thrown", which usually results in an approval at the Scheme Meeting.</p><p>The schedule reported in the filing is unchanged from the schedule in the Scheme Booklet.</p><div>
<p>Today's announcement means the merger trade is "fixed" rather than floating and now the remaining "risks" are...</p>
<ul>
<li>a small and eminently arb-able risk arb spread (which is 3.56% less comms and borrow fees as I type (excluding any franking credit benefit)</li>
<li>the risk of whether this gets voted through at the Scheme Meeting on the 13th, and</li>
<li>the index impacts</li>
</ul>
<p>There is, as always, more below the fold.</p>
</div><hr><div><table class="table table-striped">
<colgroup>
<col>
<col>
</colgroup>
<tbody>
<tr><td colspan="2" style="width: 539pt;"><h2>History of Insights on the Situation</h2></td></tr>
<tr>
<td><strong>Date</strong></td>
<td><strong>Title</strong></td>
</tr>
<tr>
<td>22 Jun 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-merger-is-a-most-marvelous-arb" target="_blank" rel="noopener">Milton Merger Is A Most Marvelous Arb</a></td>
</tr>
<tr>
<td>24 Jun 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-whsp-merger-index-implications-and-the-marvelous-arb" target="_blank" rel="noopener">Milton-WHSP Merger Index Implications and the Marvelous Arb</a></td>
</tr>
<tr>
<td>21 Jul 21</td>
<td><a href="https://www.smartkarma.com/insights/milton-s-marvelous-arm-meanders-along-marvelously" target="_blank" rel="noopener">Milton’s Marvelous Arb Meanders Along... Marvelously</a></td>
</tr>
<tr>
<td>5 Aug 21</td>
<td><a href="https://www.smartkarma.com/insights/the-still-marvelous-milton-arb-confirms-its-schedule-much-marvelousness-to-come" target="_blank" rel="noopener">The STILL MARVELOUS Milton Arb Confirms Its Schedule - Much Marvelousness to Come</a></td>
</tr>
<tr>
<td>12 Aug 21</td>
<td><a href="https://www.smartkarma.com/insights/the-magnality-of-the-marvelous-milton-merger-makes-a-moribund-march-to-metaphysis-it-s-mirific" target="_blank" rel="noopener">The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It’s Mirific!)</a></td>
</tr>
<tr>
<td>25 Aug 21</td>
<td>
<a href="https://www.smartkarma.com/insights/marvelous-milton-making-its-move-new-30yr-highs-on-both-stocks" target="_blank" data-smartkarma-citation="insights:56651" rel="noopener">Marvelous Milton Making Its Move - New 30yr Highs On Both Stocks</a> </td>
</tr>
</tbody>
</table></div><div><p></p></div>

On 2 September at 7pm Australia time, the Marvelous Milton Merger Arb ratio was fixed, and just now it was announced. The ratio of Milton Corp Ltd (MLT AU) shares to Washington H. Soul Pattinson and Co. Ltd (SOL AU) shares has been decided at 0.1863. Entitlements will be rounded up or down to the nearest share.Those who have been following on my model would have the NAV at A$5.622 on 2 Sep at the close, or A$5.702/share including the A$0.08 of dividend which went ex- on August 31. That delivered me a number of 0.1864 but they started with A$5.70 rather than A$5.702.As reported in the AFR, both major proxy services came out in favor of the deal saying advantages outweighed disadvantages, and noting the IE's "fair value" range said pricing was appropriate; in a good quote from the article, "there were no stones thrown", which usually results in an approval at the Scheme Meeting.The schedule reported in the filing is unchanged from the schedule in the Scheme Booklet.
Today's announcement means the merger trade is "fixed" rather than floating and now the remaining "risks" are...

a small and eminently arb-able risk arb spread (which is 3.56% less comms and borrow fees as I type (excluding any franking credit benefit)
the risk of whether this gets voted through at the Scheme Meeting on the 13th, and
the index impacts

There is, as always, more below the fold.






History of Insights on the Situation

Date
Title


22 Jun 21
Milton Merger Is A Most Marvelous Arb


24 Jun 21
Milton-WHSP Merger Index Implications and the Marvelous Arb


21 Jul 21
Milton’s Marvelous Arb Meanders Along... Marvelously


5 Aug 21
The STILL MARVELOUS Milton Arb Confirms Its Schedule - Much Marvelousness to Come


12 Aug 21
The Magnality of the Marvelous Milton Merger Makes a Moribund March To Metaphysis (It’s Mirific!)


25 Aug 21

Marvelous Milton Making Its Move - New 30yr Highs On Both Stocks 




Marvelous Milton Merger Mapping Mabbled: Ratio Done, Now For The Hard Part

David Blennerhassett

Last Week in Event SPACE: BHP, WH Group, Beijing Capital Land, China Life, Macau Gaming Concessions

<p>Back on 29th June 2001, BHP and Billiton merged by way of a dual-headed structure.  Shareholders continued to hold their pre-merger shares in BHP or Billiton, but with the same economic interest in the entire group, and dividends and capital distributions were equalised in accordance with a 1:1 equalisation ratio.</p>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/287/original/image?1629186949" class="editor-image img-responsive" data-smartkarma-image-id="224287"></figure>
</div>
<div>
<ul style="list-style-type: disc;">
<li>This unique structure has faced investor criticism over the years.  Most recently, on the 10 April 2017,  <a href="http://www.elliottadvisors.hk/" target="_blank" rel="noopener">Elliott Advisors (HK) Limited</a> issued a number of proposals via an <a href="https://fixingbhp.com/wp-content/uploads/2017/07/BHP-Letter-to-the-Directors.pdf" target="_blank" rel="noopener">open letter</a> to the board of <a href="https://www.smartkarma.com/entities/147" target="_blank" data-smartkarma-citation="entities:147:1" rel="noopener">BHP Billiton Limited (BHP AU)</a>. This was discussed in greater detail in <em><a href="https://skr.ma/RYqo" target="_blank" rel="noopener">Elliott's Proposals Test BHP's Metal</a></em>.</li>
<li>Elliott argued the DLC structure was obsolete, hinders the ability of BHP to reach its full potential, and creates a long-term trading mismatch between Limited and PLC shares. </li>
<li>A key tenet from the Elliott side was providing greater access to BHP’s franking credits. Elliott proposed under the unified BHP, attaching franking credits to any dividends it makes, enabling all shareholders to participate via fungibility. A similar argument was made for buybacks.</li>
<li>BHP <a href="http://www.bhpbilliton.com/-/media/documents/media/reports-and-presentations/2017/170412_bhpbillitonreviewofelliottproposalpresentation.pdf" target="_blank" rel="noopener">argued</a> the proposal would result in a wastage of franking credits, that unification is not required for off-market buybacks - indeed it would make off-market buybacks less attractive.</li>
<li>Elliott submitted a second letter on the <a href="https://fixingbhp.com/wp-content/uploads/2017/07/BHP-Press-Release-inc.-Letter-May-2017.pdf" target="_blank" rel="noopener">16 May 2017</a>, reiterating its proposals, and notably singling out BHP's "flawed" unification costs. This letter went unanswered by BHP.</li>
<li>A third letter was issued on the <a href="https://live-fixing-bhp.pantheonsite.io/wp-content/uploads/2017/07/Letter-to-Chairman-05.02.18.pdf" target="_blank" rel="noopener">5 February 2018</a>. Using analysis from FTI Consulting, it considered the unification would deliver in excess of US$22bn, with unification costs of US$391mn - against the US$1.3bn estimate from BHP.</li>
<li>Elliott also noted that following the 2015 demerger of South32, Plc no longer generates sufficient income to fund dividends. This resulted in the DLC Dividend share proposal, which was designed to support the matching-dividend policy.  When BHP merged with Billiton, one of the fundamental requirements of the structure was that cash dividends would be equal for both the British and Australian lines, under the matching-dividend policy.</li>
<li>Elliott has not issued a follow-up letter in the past three and a half years - there is a website called <a href="https://fixingbhp.com/" target="_blank" rel="noopener">Fixing BHP</a>. No doubt Elliott were somewhat mollified by BHP selling its US shale oil &amp; gas assets to BP in 2018 - a proposal advocated by Elliott - then announcing on <a href="https://www.asx.com.au/asxpdf/20181101/pdf/43zxbpdqnm2ltl.pdf" target="_blank" rel="noopener">1 November 2018</a> a US$10.4bn (A$14.7bn) return to shareholders through a special dividend (fully franked) and <a href="https://www.asx.com.au/asxpdf/20181108/pdf/440368k1w0qd6n.pdf" target="_blank" rel="noopener">share buyback</a>. </li>
</ul>
</div>
<div>
<h3>But There ARE Fundamental Reasons for BHP’s Premium</h3>
</div>
<div>
<ul>
<li>There exist strong tax arguments supporting a premium in the Australian line relating to dividends and off-market share buyback. The current premium (pre-announcement) is 19.4% (reflected in the ADRs) against a long-term average of 12.5%. </li>
</ul>
</div>
<div>
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/291/original/image_62648945021629187712421.png?1629187713" class="editor-image img-responsive" data-smartkarma-image-id="224291"></figure>
</div>
<div>
<div style="text-align: left;" class="content-caption">Source: CapIQ</div>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<strong>42% Dividend Tax Advantage</strong>. Australian investors have a highly tax-advantaged position when investing in the Australian line which provides them with a material advantage over other investors.
<ul style="list-style-type: circle;">
<li>Australian dividends are generally paid with a franking credit attached which can be used to offset the income tax liabilities of an Australian recipient.</li>
<li>The franking credit is equivalent to the corporate tax rate (currently 30%) which has been paid. In general, this means that a dollar received by a domestic investor in the Australian line is worth 42% (1/(1-30%)) more to them than an equivalent holding of the London line.</li>
</ul>
</li>
</ul>
</div>
<div class="content-caption">
<figure class="editor-figure mceNonEditable"><img src="https://static-prod.smartkarma.com/images/media/000/224/302/original/image_96891655851629189775822.png?1629189776" class="editor-image img-responsive" data-smartkarma-image-id="224302"></figure>
<p>Source: <a href="https://live-fixing-bhp.pantheonsite.io/wp-content/uploads/2018/03/FTI-Value-Release-from-Unification-at-BHP-Final.pdf" target="_blank" rel="noopener">Elliott</a> </p>
</div>
<div>
<ul>
<li>Theoretically, there is no reason for the BHP/BLT spread to stop widening until it reaches the level of 42% where the most tax-advantaged investors exhaust the excess return - provided sufficient corporate tax has been paid in Australia to cover the franking element on the dividend.</li>
<li>
<strong>The Buyback tax advantage</strong>.  The Australian franking credit system also confers a capital gains tax benefit when BHP carries out off-market tender offers. This is because for tax purposes the transaction is partially treated as a dividend which means some recipients may receive more than the market value of their holding when the franking credits are taken into account.
<ul>
<li>For this reason, BHP can initiate tender offers in Australia struck at large discounts to the market price. In the last tender offer in <a href="https://www.asx.com.au/asxpdf/20181108/pdf/440368k1w0qd6n.pdf" target="_blank" rel="noopener">2018</a>, the discount was capped at the legal maximum level (by the ATO) of 14%.</li>
<li>When the spread blows out to such a level (over 16% premium) as it has now, it compromises the ability to announce further buybacks in Australia as the spread exceeds the maximum legal tender discount level (of 14%). Meaning any Australian buyback would have to be at a premium to the London price. Therefore future buyback proposals will be forced to focus on the London line, in which the franking credits cannot be used.</li>
</ul>
</li>
</ul>
<h3>Unilever's DLC Unification</h3>
<ul>
<li>Back on the 11 June 2020, <a href="https://www.smartkarma.com/entities/unilever-nv" target="_blank" data-smartkarma-citation="entities:21141:1" rel="noopener">Unilever NV (UNA NA)</a> / <a href="https://www.smartkarma.com/entities/unilever-plc" target="_blank" data-smartkarma-citation="entities:22197:1" rel="noopener">Unilever PLC (ULVR LN)</a> <a href="https://www.unilever.com/news/press-releases/2020/unification-of-unilever-legal-structure.html" target="_blank" rel="noopener">announced</a> it would (finally) unify its dual Anglo-Dutch corporate structure under a single parent company based in London, in an about-face to the 2018 unification attempt with a Dutch-headquartered holding company. This deal was discussed in <em><a href="https://skr.ma/PyquN" target="_blank" rel="noopener">Unilever: When Two Heads Are Not Better Than One. What About BHP's DLC?</a></em>.</li>
<li>This unification again renewed interest in BHP's structure.</li>
</ul>
<h3>The New News</h3>
<ul>
<li>BHP has now <a href="https://cdn-api.markitdigital.com/apiman-gateway/ASX/asx-research/1.0/file/2924-02407981-3A572982?access_token=83ff96335c2d45a094df02a206a39ff4" target="_blank" rel="noopener">announced</a> the unification of its corporate structure to make BHP "<em>simpler and more agile</em>", thus removing the complexity of managing the DLC.</li>
<li>BHP considers now is the appropriate time to unify as there has been a significant reduction in cost indications - US$400-500mn compared to ~US$1.6-1.7bn previously.</li>
<li>More importantly, the unification means no change to the dividend policy and the ability of the company to frank dividends.</li>
<li>BHP Plc shareholders would be entitled to receive one Ltd share for each Plc share they own.</li>
<li>As night follows day, expect the spread between the two lines to narrow.</li>
</ul>
<p>More below the fold.</p>
<p></p>
<p></p>
</div>

Back on 29th June 2001, BHP and Billiton merged by way of a dual-headed structure.  Shareholders continued to hold their pre-merger shares in BHP or Billiton, but with the same economic interest in the entire group, and dividends and capital distributions were equalised in accordance with a 1:1 equalisation ratio.





This unique structure has faced investor criticism over the years.  Most recently, on the 10 April 2017,  Elliott Advisors (HK) Limited issued a number of proposals via an open letter to the board of BHP Billiton Limited (BHP AU). This was discussed in greater detail in Elliott's Proposals Test BHP's Metal.
Elliott argued the DLC structure was obsolete, hinders the ability of BHP to reach its full potential, and creates a long-term trading mismatch between Limited and PLC shares. 
A key tenet from the Elliott side was providing greater access to BHP’s franking credits. Elliott proposed under the unified BHP, attaching franking credits to any dividends it makes, enabling all shareholders to participate via fungibility. A similar argument was made for buybacks.
BHP argued the proposal would result in a wastage of franking credits, that unification is not required for off-market buybacks - indeed it would make off-market buybacks less attractive.
Elliott submitted a second letter on the 16 May 2017, reiterating its proposals, and notably singling out BHP's "flawed" unification costs. This letter went unanswered by BHP.
A third letter was issued on the 5 February 2018. Using analysis from FTI Consulting, it considered the unification would deliver in excess of US$22bn, with unification costs of US$391mn - against the US$1.3bn estimate from BHP.
Elliott also noted that following the 2015 demerger of South32, Plc no longer generates sufficient income to fund dividends. This resulted in the DLC Dividend share proposal, which was designed to support the matching-dividend policy.  When BHP merged with Billiton, one of the fundamental requirements of the structure was that cash dividends would be equal for both the British and Australian lines, under the matching-dividend policy.
Elliott has not issued a follow-up letter in the past three and a half years - there is a website called Fixing BHP. No doubt Elliott were somewhat mollified by BHP selling its US shale oil &amp; gas assets to BP in 2018 - a proposal advocated by Elliott - then announcing on 1 November 2018 a US$10.4bn (A$14.7bn) return to shareholders through a special dividend (fully franked) and share buyback. 



But There ARE Fundamental Reasons for BHP’s Premium



There exist strong tax arguments supporting a premium in the Australian line relating to dividends and off-market share buyback. The current premium (pre-announcement) is 19.4% (reflected in the ADRs) against a long-term average of 12.5%. 






Source: CapIQ




42% Dividend Tax Advantage. Australian investors have a highly tax-advantaged position when investing in the Australian line which provides them with a material advantage over other investors.

Australian dividends are generally paid with a franking credit attached which can be used to offset the income tax liabilities of an Australian recipient.
The franking credit is equivalent to the corporate tax rate (currently 30%) which has been paid. In general, this means that a dollar received by a domestic investor in the Australian line is worth 42% (1/(1-30%)) more to them than an equivalent holding of the London line.






Source: Elliott 



Theoretically, there is no reason for the BHP/BLT spread to stop widening until it reaches the level of 42% where the most tax-advantaged investors exhaust the excess return - provided sufficient corporate tax has been paid in Australia to cover the franking element on the dividend.

The Buyback tax advantage.  The Australian franking credit system also confers a capital gains tax benefit when BHP carries out off-market tender offers. This is because for tax purposes the transaction is partially treated as a dividend which means some recipients may receive more than the market value of their holding when the franking credits are taken into account.

For this reason, BHP can initiate tender offers in Australia struck at large discounts to the market price. In the last tender offer in 2018, the discount was capped at the legal maximum level (by the ATO) of 14%.
When the spread blows out to such a level (over 16% premium) as it has now, it compromises the ability to announce further buybacks in Australia as the spread exceeds the maximum legal tender discount level (of 14%). Meaning any Australian buyback would have to be at a premium to the London price. Therefore future buyback proposals will be forced to focus on the London line, in which the franking credits cannot be used.



Unilever's DLC Unification

Back on the 11 June 2020, Unilever NV (UNA NA) / Unilever PLC (ULVR LN) announced it would (finally) unify its dual Anglo-Dutch corporate structure under a single parent company based in London, in an about-face to the 2018 unification attempt with a Dutch-headquartered holding company. This deal was discussed in Unilever: When Two Heads Are Not Better Than One. What About BHP's DLC?.
This unification again renewed interest in BHP's structure.

The New News

BHP has now announced the unification of its corporate structure to make BHP "simpler and more agile", thus removing the complexity of managing the DLC.
BHP considers now is the appropriate time to unify as there has been a significant reduction in cost indications - US$400-500mn compared to ~US$1.6-1.7bn previously.
More importantly, the unification means no change to the dividend policy and the ability of the company to frank dividends.
BHP Plc shareholders would be entitled to receive one Ltd share for each Plc share they own.
As night follows day, expect the spread between the two lines to narrow.

More below the fold.




Australia

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