BHP Billiton’s plan to spin out a group of non-core assets is far from a fait accompli, with a top 10 shareholder refusing to guarantee his support and legal experts warning that demerger relief from the Tax Office was far from assured.
This week’s financial results and demerger plan have received a bumpy response from investors, with BHP’s London shares falling by more than 4 per cent on Tuesday before the company’s Australian shares fell by 3.9 per cent on Wednesday.
Shareholders will get a chance to vote on the demerger plan at a extraordinary general meeting within the next year, and Australian Foundation Investment Company managing director Ross Barker said it was too early to say how he would vote.
‘‘We would certainly want to see what the company actually says in their explanatory memorandum,’’ he said.
‘‘It is a little bit unusual in the sense that up to the current time the conventional wisdom has been to have a broad portfolio of a lot of different minerals meant you got diversification benefits, but it’s clear from this strategy that they want to focus on the high-margin four or five very low-cost businesses and put the lower margin ones into a different company.’’
AFIC ranks as the sixth-biggest shareholder in BHP’s Australian shares, and the related Djerriwarrh fund ranks as the 34th-biggest holder of the Australian stock.
Mr Barker stressed he was not opposed to the demerger, but noted that other diversified miners were becoming more optimistic about some of the commodities that BHP will no longer have exposure to under the demerger plan.
‘‘Those sorts of things come and go in cycles and who knows, in 12 or 18 months time alumina and aluminium might be desirable places to be and obviously there are some parts of those businesses that Rio [Tinto] thinks are good,’’ he said.
Many analysts believe the sell-down of BHP shares over the past 24 hours was more linked to the lack of share buybacks, and Mr Barker said he was unclear on what BHP’s plan was for shareholder returns.
‘‘I think the comment they made in the announcement was that capital management would be done in a consistent manner, but we are not quite sure what it actually means,’’ he said.
Mr Barker was more positive about the continued reduction of BHP’s debt.
‘‘Reducing debt is a good thing in this kind of environment,’’ he said.
Aside from a shareholder vote, BHP said it would need clearance from Australia’s Foreign Investment Review Board before pushing ahead with the demerger, and also confirmation from the Tax Office that it would be eligible for ‘‘demerger relief’’.
Minter Ellison lawyer Adrian Varasso said applications for demerger relief were not simple.
‘‘Seeking demerger relief from the Tax Office is definitely not just a rubber stamp, these can be intensive processes,’’ he said.
‘‘In most scenarios there is potential for rulings to go either way.’’
Many of the assets bound for the demerged vehicle are joint ventures between BHP and other companies such as Anglo American, Alcoa and Mitsubishi, and the miner will likely need to consult those partners too.
But Northcape Capital analyst Craig Campbell said he did not expect any of those partners to cause too much trouble.
‘‘I'm not sure if anything is easy when you do this sort of stuff. But I think the market would be surprised if it were blocked by any of the joint venture partners,’’ he said.
