Pan-Asia Catalysts/Events, Quiddity Advisors

Travis Lundy

Pan-Asia Catalysts/Events

Quiddity Advisors

Event-Driven

<p>The <strong>Marvelous Milton Merger</strong> which is the proposed joining of two of Australia's longest-lived Listed Investment Companies - <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> to be absorbed in a share swap by <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> ("WHSP") - is coming closer to its do-or-die date.</p><p>There is one week until the Reference Date which will decide the share swap ratio and there are 12 trading days until the Scheme Meeting. </p><p>I have not been shy in writing about this situation. </p><table class="table table-striped">
<colgroup>
<col>
<col>
</colgroup>
<tbody>
<tr><td colspan="2" style="text-align: left; 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>
</tbody>
</table><p>As time has passed, and the situation has looked more and more attractive, my mafficking and multitarian mysteriosophy (and occasional mussitation) has led to longer titles with more and more Ms.</p><p>This time, I note that with both Milton and WHSP hitting new 30-year highs today, despite the merger arb spread remaining reasonably wide, there are signs that the situation has started "accruing value."</p><p>While I am far from being a martinet (I am indeed more a mobilist), my mathemancy suggests Milton is maturing. </p><p><em>More on how to Mind the Movement below the fold. </em></p>

The Marvelous Milton Merger which is the proposed joining of two of Australia's longest-lived Listed Investment Companies - Milton Corp Ltd (MLT AU) to be absorbed in a share swap by Washington H. Soul Pattinson and Co. Ltd (SOL AU) ("WHSP") - is coming closer to its do-or-die date.There is one week until the Reference Date which will decide the share swap ratio and there are 12 trading days until the Scheme Meeting. I have not been shy in writing about this situation. 





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!)


As time has passed, and the situation has looked more and more attractive, my mafficking and multitarian mysteriosophy (and occasional mussitation) has led to longer titles with more and more Ms.This time, I note that with both Milton and WHSP hitting new 30-year highs today, despite the merger arb spread remaining reasonably wide, there are signs that the situation has started "accruing value."While I am far from being a martinet (I am indeed more a mobilist), my mathemancy suggests Milton is maturing. More on how to Mind the Movement below the fold. 

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

David Blennerhassett

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

European Event-Driven Analyst

Jesus Rodriguez Aguilar

<div class="content-highlight">
<p><strong><em>Corrigenda: There is an error in this Insight. Please note the correction.</em></strong></p>
<p><strong><em>Correction: [Under the section “Collapsing of BHP’s DLC”, subsection “Conditions and approvals”, the Ltd leg does not need a headcount test for approval, while the UK leg does.]</em></strong></p>
</div>
<p>BHP has decided to streamline its market listings <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> and <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> after the company confirmed plans to dispose of its oil and gas business in an all-share merger with <a href="https://www.smartkarma.com/entities/woodside-petroleum-ltd" target="_blank" data-smartkarma-citation="entities:177:1" rel="noopener">Woodside Petroleum (WPL AU)</a> (52% Woodside, 48% BHP, completion expected Q1 2022). The disposal will help BHP focus on mining iron ore, copper and nickel. </p>
<p>The DLC collapse, which has not yet been agreed, will result in a "simpler and more efficient" structure, with greater flexibility to shape its portfolio. The main listing will be in Sydney, with a standard listing on London Stock Exchange and a secondary one on the Johannesburg Stock Exchange. This will need approval from the Board and others. One-off costs are c. USD400-500 mn, with completion expected in H1 CY22. It will be carried out as a scheme of arrangement, thus requiring 75% approval by Ltd and Plc shareholders. </p>
<p style="text-align: start;">The Sydney listed BHP Billiton has, since its debut in March 2001, traded at a premium to the London listing. As of my last insight on European DLCs and HoldCos, 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> at close of June was 23.8% (vs. 21.8% at the end of April), against a 10-year average of 14.7%. My recommendation then was "rather be long the UK plc and short the Aussie Ltd through the US listings".</p>
<p style="text-align: start;">This on-going discount on the London market is due to the majority of shareholders in BHP Billiton being ex BHP Ltd shareholders, and the index weighting of BHP AU versus BHP LN, in my view. I believe that the main factor influencing the recent widening of the discount between BHP AU and BLT LN is the commodity price cycle. Australian fund managers cannot be heavily underweight in the mining sector, which represents c. 20% of the ASX. Because of asset allocation constraints, an Australian fund manager may not be able to invest in the UK line of a DLC even if it is at a discount to the Australian line.</p>
<p style="text-align: start;">BHP Billiton will leave the FTSE 100 index and shift its primary listing to Sydney, with a secondary listing on London Stock Exchange and Johannesburg Stock Exchange. This will force index tracker funds to sell their shares.</p>
<p style="text-align: start;">The unification of BHP will be similar to that of<strong> Brambles</strong>. On 29 November 2005, the Brambles Board announced its intention to streamline the Brambles Group by selling Cleanaway, Brambles Industrial Services and Regional Businesses and focusing on CHEP and Recall, its businesses with premium growth potential. This was followed by the unification of the DLC Structure under a single Australian holding company with a primary listing on the ASX and a secondary listing on the LSE. Brambles filed on September 13<sup>th</sup>, 2006 an Information Memorandum relating to the abolition of DLC structure. The abolition was structured as two parallel Schemes of Arrangement. The unification of the DLC was approved by the EGMs and Brambles delivered a conversion to a single equity. The c. 3% discount at the time of announcement was eliminated.</p>
<p style="text-align: start;">The economic logic for collapsing the DLC is compelling, and I believe it will be carried out. The <strong>premium of BHP AU to BLT LN is shrinking fast</strong>, from 21% prior to announcement. However, it is <strong>still 6.1%</strong>, which is still an interesting level.</p>
<p style="text-align: start;">Recommendation is <strong>long BLT LN/Short BHP AU</strong>. It can also be done through the US listings.</p>


Corrigenda: There is an error in this Insight. Please note the correction.
Correction: [Under the section “Collapsing of BHP’s DLC”, subsection “Conditions and approvals”, the Ltd leg does not need a headcount test for approval, while the UK leg does.]

BHP has decided to streamline its market listings BHP Group (BHP AU) and BHP Billiton (BLT LN) after the company confirmed plans to dispose of its oil and gas business in an all-share merger with Woodside Petroleum (WPL AU) (52% Woodside, 48% BHP, completion expected Q1 2022). The disposal will help BHP focus on mining iron ore, copper and nickel. 
The DLC collapse, which has not yet been agreed, will result in a "simpler and more efficient" structure, with greater flexibility to shape its portfolio. The main listing will be in Sydney, with a standard listing on London Stock Exchange and a secondary one on the Johannesburg Stock Exchange. This will need approval from the Board and others. One-off costs are c. USD400-500 mn, with completion expected in H1 CY22. It will be carried out as a scheme of arrangement, thus requiring 75% approval by Ltd and Plc shareholders. 
The Sydney listed BHP Billiton has, since its debut in March 2001, traded at a premium to the London listing. As of my last insight on European DLCs and HoldCos, the 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%. My recommendation then was "rather be long the UK plc and short the Aussie Ltd through the US listings".
This on-going discount on the London market is due to the majority of shareholders in BHP Billiton being ex BHP Ltd shareholders, and the index weighting of BHP AU versus BHP LN, in my view. I believe that the main factor influencing the recent widening of the discount between BHP AU and BLT LN is the commodity price cycle. Australian fund managers cannot be heavily underweight in the mining sector, which represents c. 20% of the ASX. Because of asset allocation constraints, an Australian fund manager may not be able to invest in the UK line of a DLC even if it is at a discount to the Australian line.
BHP Billiton will leave the FTSE 100 index and shift its primary listing to Sydney, with a secondary listing on London Stock Exchange and Johannesburg Stock Exchange. This will force index tracker funds to sell their shares.
The unification of BHP will be similar to that of Brambles. On 29 November 2005, the Brambles Board announced its intention to streamline the Brambles Group by selling Cleanaway, Brambles Industrial Services and Regional Businesses and focusing on CHEP and Recall, its businesses with premium growth potential. This was followed by the unification of the DLC Structure under a single Australian holding company with a primary listing on the ASX and a secondary listing on the LSE. Brambles filed on September 13th, 2006 an Information Memorandum relating to the abolition of DLC structure. The abolition was structured as two parallel Schemes of Arrangement. The unification of the DLC was approved by the EGMs and Brambles delivered a conversion to a single equity. The c. 3% discount at the time of announcement was eliminated.
The economic logic for collapsing the DLC is compelling, and I believe it will be carried out. The premium of BHP AU to BLT LN is shrinking fast, from 21% prior to announcement. However, it is still 6.1%, which is still an interesting level.
Recommendation is long BLT LN/Short BHP AU. It can also be done through the US listings.

BHP's DLC Unwinding, Following Brambles' Trail

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

<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

BHP Billiton Limited 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, production, and refining.  Dually-listed company with BLT LN.

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BHP Group Ltd (BHP US)

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