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The big BHP vote is here

James Gard  |  18 Jan 2022Text size  Decrease  Increase  |  
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It’s crunch time for mining giant BHP. This week, shareholders will vote on plans to end its dual listing in London and Sydney. Investors are expected to back proposals that could see BHP lose its FTSE 100 status and move its main listing to Australia, which has implications for shareholders and passive Australian funds holders.

What’s the status quo?

Currently, BHP is two separate legal entities: BHP Group Plc (BHP), listed in London with the ticker BHP and Johannesburg and in New York as an American Depository Receipt (ADR); and in Sydney as BHP Group Limited (ASX: BHP) with the same ticker.

The London shares trade at £23.78 and the Sydney shares trade at $46.68, based on prices on January 14. Even taking exchange rates into account, the Australian-listed shares trade at a premium, and this may tempt UK holders of the shares to hold on to them in the hope of a modest bounce in the value of their holdings.

At the moment, UK and Australian shareholders have equal voting rights and the company’s HQ is in Melbourne, Australia. Australia is the base for the company’s mining activities  Queensland is the centre of its iron ore operations, with nickel produced out of Western Australia and coal in New South Wales.

Why is BHP proposing this?

The company says it continually reviews the existing structure to see if it is fit for purpose. Unifying the two companies would help speed up corporate decisions such as mergers and acquisitions, BHP argues. For example, BHP Petroleum is planning to merge with Woodside Petroleum, a deal that could provide a windfall for existing BHP shareholders.

Of course, the carbon transition is a factor in BHP wanting greater flexibility in buying and selling off assets. BHP is conducting a review of its oil and gas assets, which were written down in value in 2021. This debate is taking place across the entire resources sector, with Shell under pressure to hive off legacy assets and focus on renewables. Shell itself has just received unanimous approval to delist from Amsterdam, shift its main listing to London, and clean up its share structure.

What happens next?

If the plans are approved, owners of BHP in London will see their shares swapped on a one-for-one basis for the Australian shares. BHP will remain listed in London but will lose its primary listing status, which means it may not be part of the FTSE 100 any longer. This means UK tracker funds may no longer need to have any allocation to the company.

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For Australian passive investors, BHP will likely become Australia’s largest company. Its greater weight in the S&P/ASX 200 could push ETFs tracking the index to become even more concentrated in resource shares.

Research produced last year from Morgan Stanley, financial adviser to Woodside on the merger deal shows that if BHP were to incorporate all its shares on the ASX, BHP's index weight within the S&P/ASX 200 would jump to 11.7 per cent from 7.2 per cent, surpassing the Commonwealth Bank of Australia as Australia’s largest company. The materials sector weight would increase to 24.1 per cent of the S&P/ASX 200, still below the financials sector index weight of 28.3 per cent.

In a statement last week, S&P Dow Jones said subject to the unification receiving approval, the index manager would "upweight" BHP in S&P/ASX indicies "all at once" prior to the open of trading on 31 January 2022. 

What’s happening in Australia?

Hedge funds are using the plans and difference between London and Sydney share prices as arbitrage, as my colleague Lewis Jackson explains.

“Because the local listing has historically traded at a higher price due to franking credits, Plc shareholders will pocket a premium if the deal goes through. Hedge funds are snapping up the cheaper Plc shares and selling Ltd short, planning to close out shorts once the company unifies," he says.

He adds the shares could rise in value if the deal goes through because Australian trackers funds will have to allocate a bigger weighting to BHP.

What do Morningstar analysts think?

Morningstar’s mining analyst Matthew Hodge, meanwhile, says the dual structure has had its day and thinks investors should vote for the unification.

“The dual-listed structure was established 20 years ago as a tax-effective structure following the Billiton merger, and it is no longer necessary in today’s operating environment, with the one group, BHP Group Ltd being sufficient,” he says.

“We think the unification plan makes sense and recommend shareholders vote in favour of the deal. Unification allows BHP to reduce corporate costs while making some forms of corporate activity, such as the proposed merger of BHP Petroleum with Woodside easier.”

What are the details of the vote?

Australians vote first on January 20, before London shareholders then have their say. The vote will be conducted online in Australia due to the ongoing covid-19 situation. The proposal has a 75% hurdle rate to go through (the hurdle rate is the minimum required returned by a fund, hedge fund manager, or investor). Substantial shareholders listed in the latest annual report include BlackRock Group and Vanguard Group for BHP Group Ltd.

The deal has received the backing of several asset managers including Wilson Asset Management, K2 Asset Management and superannuation fund UniSuper while Pendal Group and Ausbil said they would vote against unification, according to reports. If accepted, the deal will complete at the end of this month.

is senior editor for Morningstar.co.uk

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