Interactive Investor

What does BHP’s structure change mean for shareholders?

18th August 2021 15:37

Graeme Evans from interactive investor

Our stocks expert takes a close look at the corporate structure changes underway at the mining giant and possible consequences for UK investors.

Anglo-Australian mining giant BHP Group (LSE:BHP) is undergoing some major changes in how it is structured, with the aim of simplifying the business and becoming more efficient. This is what it means for shareholders and investors in the UK.

What's the current position?

BHP Billiton - since renamed BHP Group - was formed in June 2001 from the merger of BHP Limited (an Australian listed company) and Billiton Plc (a UK listed company).

The merger was completed by way of a dual listed companies structure, meaning that although they are technically separate with their own share listings and share registers, the companies are one single economic entity with a common board of directors and management team.

Shareholders in BHP Group Limited on the Australian Securities Exchange and BHP Group Plc on the London Stock Exchange have equal economic and voting rights, as if they held shares in a single company. The headquarters are located in Melbourne, Australia.

There's also a secondary listing on the Johannesburg Stock Exchange and American Depositary Receipts in the two entities trade on the New York Stock Exchange.

What's changing?

BHP intends to unify its corporate structure under the existing Australian parent company so that it become a more efficient and agile company. This means Plc shares will be exchanged for Limited shares on a one-for-one basis.

The unified BHP will have its primary listing on the Australian Securities Exchange, with the listing on the London Stock Exchange downgraded to a standard one. Based on the current rules, a unified BHP would not qualify for inclusion in the FTSE UK Index Series.

This means the FTSE 100 index will lose its second largest stock with a current market capitalisation of close to £130 billion.

Unification is still subject to final board approval, as well as the support of shareholders voting separately in the Plc and Limited entities. Once regulatory and court approvals have been secured. the move is expected to take place in the first half of 2022.

It's worth remembering, however, that attempts by Unilever to scrap its Anglo-Dutch structure and unify in Rotterdam were vetoed by major City institutions in 2018, before they voted in favour of a London-based entity a couple of years later.

What's driving the unification?

The move has been the subject of regular speculation, with New York-based activist investor Elliott Advisors among those previously calling for BHP to simplify its corporate structure.

Changes in BHP's portfolio and corporate structure have greatly reduced the one-off unification costs in recent years, with the company now forecasting a figure of between $400 million and $500 million. The most significant of these costs relates to stamp duties levied on Limited as a result of its acquisition of shares in Plc in order to implement unification.

BHP also highlighted the reduced contribution of Plc’s earnings relative to Limited’s earnings.

The divestment of assets previously held by Plc and changes in commodity prices mean the London-based entity contributes less than 5% of the total, compared with 40% at the time of the BHP Billiton merger.

The ongoing earnings imbalance has also meant Limited continuing to pay significant dual-listed dividends to the Plc.

Unification would simplify corporate processes, reduce duplication and improve flexibility for deal-making, such as the shares-based acquisition revealed this week for the separation of BHP's oil and gas assets.

This will be carried out once the unification is complete, with BHP shareholders getting Woodside Petroleum shares as part of the merger deal.

What's the impact on UK investors?

Shares in the unified entity will continue to trade in London through a secondary listing, but some trackers and other funds may have to dump the stock if it is no longer in the FTSE 100 index.

That would be a big blow given the forward yield of over 7%, with yesterday's final dividend of $2 per share meaning a total of more than US $15 billion for the full year. 

As well as these returns, there's the potential loss of exposure to a stock positioning itself for the mega-trends of electrification and decarbonisation, with exposure to copper and nickel.

One potential benefit for UK investors who stay on board is that the London-listed shares currently trade at a discount of about 20% to their equivalent Australian listed shares.

Specific details on the unification will be disclosed by BHP in due course.

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