European Event-Driven Analyst

Jesus Rodriguez Aguilar

Event-Driven

Groupe Bruxelles Lambert Sa / Event-Driven

<div>
<p>Discounts to NAV for our selected European holdcos and DLCs have generally tightened during October.</p>
</div>
<div>
<p>The report incorporates several SOTP valuations, updated with Q3 results for the Swedish holdcos.</p>
</div>
<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 October was 3.7%, in the context of the DLC collapse.  Long UK plc / short Aussie Ltd through the US listings.</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 <strong>41.2%</strong> (vs. 40.9% at the end of September (down from 47.9% at the end of February).  The partial takeover bid over <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, has ended, and the discount can be again played. Alba has some quality assets, a diversified portfolio and is fundamentally cheap, 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 to 29%. Shares are trading at historic highs. Long GBL / Short main listed assets (SGS, Pernod Ricard, Adidas and Umicore, which represent 59% of NAV).</p>
</li>
<li>
<p>The discount in Heineken Holdings relative to Heineken has tightened to 16.3% (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 200-300bps. The upwards trend 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 7.8% discount to NAV (almost the same level as at the end of September and 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 is tightening. <strong>Long INDUC SS/short main listed assets</strong>.</p>
</li>
<li>
<p>The discount to NAV 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 tightened to 14.9% as of 29 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 a <strong>21.3% premium to NAV</strong> (vs. 13% premium at the end of September). A shares are trading at a 24% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The share price of Kinnevik has performed as a result of the digital exposure of the company, and the stars have been Zalando and Global Fashion Group. The reduction on Kinnevik's discount during 2020 and until recently this year has been striking. Investors are backing the change of tack in the company, which now acts as a listed VC. Listed assets just represent 52% of NAV.</p>
</li>
<li>
<p>The premium 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 8.6% (vs. 9.4% at close of September), against a long-term average of 15.6%. It is on a downwards trend. <strong>Long plc/short ltd</strong>.</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 in October in New York at a discount of 0.2% (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 October.


The report incorporates several SOTP valuations, updated with Q3 results for the Swedish holdcos.




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 October was 3.7%, in the context of the DLC collapse.  Long UK plc / short Aussie Ltd through the US listings.


Corp Financiera Alba Sa (ALB SM) is trading at a 41.2% (vs. 40.9% at the end of September (down from 47.9% at the end of February).  The partial takeover bid over Naturgy Energy Group SA (NTGY SM), one of its main assets, has ended, and the discount can be again played. Alba has some quality assets, a diversified portfolio and is fundamentally cheap, in my view.


The discount to NAV of Groupe Bruxelles Lambert Sa (GBLB BB) has tightened to 29%. Shares are trading at historic highs. Long GBL / Short main listed assets (SGS, Pernod Ricard, Adidas and Umicore, which represent 59% of NAV).


The discount in Heineken Holdings relative to Heineken has tightened to 16.3% (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 200-300bps. The upwards trend seems clear by now, and it is not easy to call the top.


Industrivarden AB (INDUA SS) C shares are trading at a 7.8% discount to NAV (almost the same level as at the end of September and 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 is tightening. Long INDUC SS/short main listed assets.


The discount to NAV of Investor AB (INVEB SS) B shares tightened to 14.9% as of 29 October.


From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) B shares traded at a 21.3% premium to NAV (vs. 13% premium at the end of September). A shares are trading at a 24% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The share price of Kinnevik has performed as a result of the digital exposure of the company, and the stars have been Zalando and Global Fashion Group. The reduction on Kinnevik's discount during 2020 and until recently this year has been striking. Investors are backing the change of tack in the company, which now acts as a listed VC. Listed assets just represent 52% of NAV.


The premium of Rio Tinto Ltd (RIO AU) vs. Rio Tinto PLC (RIO LN) has tightened and at the end of September was 8.6% (vs. 9.4% at close of September), against a long-term average of 15.6%. It is on a downwards trend. Long plc/short ltd.


Royal Dutch Shell PLC (RDS/B US) “B” shares closed in in October in New York at a discount of 0.2% (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: October Report

<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

Smartkarma Research Team, Smartkarma

Smartkarma Research

Smartkarma Research Team

Smartkarma

Smartkarma unites the fragmented investment industry, connecting institutional investors, independent research providers, and corporates within a single network.

Research Reinvented

<p>Our latest Flash Webinar looks at the <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> reunification, after the recent announcement by the Group about unifying its corporate structure in order to make BHP "simpler and more agile". To help us explore the implications for investors, we welcome Insight Providers <a href="https://www.smartkarma.com/profiles/david-blennerhassett" target="_blank" data-smartkarma-citation="accounts:840" rel="noopener">David Blennerhassett</a> and <a href="https://www.smartkarma.com/profiles/travis-lundy" target="_blank" data-smartkarma-citation="accounts:25" rel="noopener">Travis Lundy</a> of Quiddity Advisors. </p>
<h3>The flash webinar will be hosted on Thursday, 19 August 2021, 2.00pm SGT/HKT.</h3>
<div class="content-highlight">
<h2><a href="https://share.hsforms.com/1H9pFZOB-RF2J00kbvMmxcw2c5gj?zoom_webinar_id=89001347179" target="_blank" rel="noopener">Register for the Webinar here</a></h2>
</div>
<p>David Blennerhassett is a highly experienced sell-side analyst with in excess of 20 years of covering Asia Pacific equities, the past 13 years immersed in event strategies encompassing M&amp;A risk arbitrage, directional long/short, stub trades, and restructuring.</p>
<p>Travis Lundy has 20+ years of experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies, with most of that time spent managing money.</p>

Our latest Flash Webinar looks at the BHP Group (BHP AU) reunification, after the recent announcement by the Group about unifying its corporate structure in order to make BHP "simpler and more agile". To help us explore the implications for investors, we welcome Insight Providers David Blennerhassett and Travis Lundy of Quiddity Advisors. 
The flash webinar will be hosted on Thursday, 19 August 2021, 2.00pm SGT/HKT.

Register for the Webinar here

David Blennerhassett is a highly experienced sell-side analyst with in excess of 20 years of covering Asia Pacific equities, the past 13 years immersed in event strategies encompassing M&amp;A risk arbitrage, directional long/short, stub trades, and restructuring.
Travis Lundy has 20+ years of experience in Asia doing alternative strategies (i.e. non-delta1 non long-only) in fixed income, equity derivatives, and activist/catalyst/event-driven and long-short equity strategies, with most of that time spent managing money.

Smartkarma Flash Webinar | BHP DLC Reunification

Pan-Asia Catalysts/Events, Quiddity Advisors

David Blennerhassett

Pan-Asia Catalysts/Events

Quiddity Advisors

<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.




<div>
<p>Discounts to NAV for our selected European holdcos and DLCs have not shown a clear trend in June.</p>
</div>
<div>
<p>The report incorporates several SOTP valuations.</p>
</div>
<div>
<ul style="list-style-type: disc;">
<li>
<p>The current 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> at close of June was 23.8% (vs. 21.8% at the end of April), against a 10-year average of 14.7%. I would rather be long the UK plc and short the Aussie Ltd through the US listings.</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 42.3% discount to NAV  (down from 47.9% at the end of February). The discount does not seem to be arbitraged lately. <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 portfolio main assets, is the object of a partial takeover bid; <a href="https://www.smartkarma.com/entities/euskaltel-sa" target="_blank" data-smartkarma-citation="entities:21263:1" rel="noopener">Euskaltel SA (EKT SM)</a> is the object of a full takeover bid, as it has been previously flagged here. Alba has some quality assets and is fundamentally cheap, in my view.</p>
</li>
<li>
<p>The <strong>discount to NAV</strong> 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 <strong>32.7%</strong>. There are no catalysts in sight and the discount stubbornly keeps above 30%.</p>
</li>
<li>
<p>The <strong>discount in Heineken Holdings relative to Heineken has widened to 16.4%</strong> (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 1.1% premium to NAV. The average discount for the last five years for the C shares has been 11.5%.</p>
</li>
<li>
<p>The discount to NAV 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 remained at the same level as end of May, 8.8% (vs. 17.1% at the end of February).</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> 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> <strong>B shares traded at an 14.9% premium to NAV</strong> at the end of June (vs a 1.6% discount at the end of February). A shares are trading at a c. 40.1% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The discount of B shares to A shares began to increase my mid January, now it is c. 29.5%; voting rights count again at Kinnevik. 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.</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 discount of 3.9% (tightened vs. 5.9% as of end of May) 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. Trade: LONG RDSB ADR/SHORT RDSA ADR. Target: 2% premium.</p>
</li>
</ul>
</div>


Discounts to NAV for our selected European holdcos and DLCs have not shown a clear trend in June.


The report incorporates several SOTP valuations.




The current premium of BHP Group (BHP AU) vs.  Bhp Billiton (BLT LN) at close of June was 23.8% (vs. 21.8% at the end of April), against a 10-year average of 14.7%. I would rather be long the UK plc and short the Aussie Ltd through the US listings.


Corp Financiera Alba Sa (ALB SM) is trading at a 42.3% discount to NAV  (down from 47.9% at the end of February). The discount does not seem to be arbitraged lately. Naturgy Energy Group SA (NTGY SM), one of its portfolio main assets, is the object of a partial takeover bid; Euskaltel SA (EKT SM) is the object of a full takeover bid, as it has been previously flagged here. Alba has some quality assets and is fundamentally cheap, in my view.


The discount to NAV of Groupe Bruxelles Lambert Sa (GBLB BB) has tightened slightly to 32.7%. There are no catalysts in sight and the discount stubbornly keeps above 30%.


The discount in Heineken Holdings relative to Heineken has widened to 16.4% (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 1.1% premium to NAV. 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 remained at the same level as end of May, 8.8% (vs. 17.1% at the end of February).


From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) From my SOTP valuation, Investment Ab Kinnevik (KINVB SS) B shares traded at an 14.9% premium to NAV at the end of June (vs a 1.6% discount at the end of February). A shares are trading at a c. 40.1% premium to NAV. Until mid-January, the price difference between A and B shares was rather small. The discount of B shares to A shares began to increase my mid January, now it is c. 29.5%; voting rights count again at Kinnevik. 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.


Royal Dutch Shell PLC (RDS/B US) “B” shares closed in June in New York at a discount of 3.9% (tightened vs. 5.9% as of end of May) with respect to the Royal Dutch Shell Plc (Adr) (RDS/A US) “A” shares. Trade: LONG RDSB ADR/SHORT RDSA ADR. Target: 2% premium.




Selected European Holdcos and DLCs: June Report

Australia

BHP Billiton PLC is an international resources company.  The Company's principal business lines are mineral exploration and production, including coal, iron ore, gold, titanium, ferroalloys, nickel and copper concentrate, as well as petroleum exploration and production.  Dually-listed company with BHP AU.

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BHP Billiton Plc (ADR) (BBL US)

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