Late on Monday, investment funds associated with United States activist investor Paul Singer went public with a proposal to prod global miner BHP Billiton to collapse its dual company structure as well as spin-out its U.S. petroleum assets.
Elliott also wants BHP to adopt a consistent capital return policy that would allow it to take advantage of its substantial franking credit balance through off-market buybacks, rather than using its excess cash "to make value destructive acquisitions", Elliott said.
That would create a single Australian-headquartered firm that would retain BHP's current stock market listings and keep them in Sydney's and London's benchmark share price indices, according to Elliott.
The bulk of Elliott's BHP Billiton shareholding is in the United Kingdom -listed arm, in which it holds a stake of 4.1 per cent.
Elliott, which manages over US$32.7 billion in global assets, in its letter advised BHP to bring its British entity under the control of its Australian arm.
The Sydney shares closed 4.6 per cent higher at A$25.73 on Monday, while the London shares were up over 5 per cent in early trade.
"Based on commonly utilized valuation metrics for comparable businesses, the indicated value for BHP's USA petroleum business is [approximately] US$22 billion, which is well in excess of the current analyst consensus valuation for that business", said the Elliott Funds, which hold 4.1% of BHP Billiton plc.
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In its letter, Elliott told BHP it could unlock shareholder value by spinning off about $22 billion of its U.S. oil assets and list them in NY.
BHP said it's been in talks with the hedge fund for many months, and the costs and risks associated with the proposals outweigh the benefits.
Its investors include pension plans, sovereign wealth funds and hospitals, among others, it said.
"We have laid the foundations for the group to substantially grow the base value of its operations".
It argued that, since 2001, BHP has returned around 23 billion U.S. dollars to shareholders in buybacks and approximately 56 billion United States dollars in cash dividends.
It is also a rather limp way of pressuring BHP from a position of weakness because most of the big shareholdings are in BHP's Australian listed shares. Since 2013, BHP Billiton has reduced the number of assets in the portfolio by more than one third, through the de-merger of South32 (SOUHY) and the sale of over US$7 billion of assets.
Still, that move "actually magnified the inefficiencies" of BHP's dual-corporate structure, leaving its London entity generating just 10.3% of revenue, Elliott said. BHP Billiton plc has a 1-year low of $22.37 and a 1-year high of $37.44. The average 1 year price objective among brokerages that have issued a report on the stock in the last year is GBX 1,284.10 ($15.95). "BHP Billiton's approach is to optimize the long-term value of the petroleum business through operating excellence". The Company is a producer of various commodities, including iron ore, metallurgical coal, copper and uranium. The company earned about 20 percent of its underlying profit from the global oil business in the six months ended December, less than half the proportion coming from iron ore, data compiled by Bloomberg show.