Sat. May 21st, 2022

In less than two weeks, BHP (ASX: BHP) will be whole again after shareholders in London and Melbourne voted overwhelmingly to collapse its dual structure on Thursday night.

It comes 20 years after BHP merged with Billiton to create the two-headed monster that was DLC.

The move had a minority of bankers, particularly from Australian investors, who said the 1-on-1 offer was at a disadvantage as the Australian shares were traded at a premium relative to the UK share.

But arguments from the iron ore giant’s board that it would save administrative costs and make it more flexible to M&A opportunities won the day with around 96% of Australian votes and 97% of London votes falling in their favor.

Both votes required 75% approval for the proposals to be adopted.

“In terms of quantitative benefits, the direct cost savings are in the order of $ 3 or $ 4 million a year, and that is with the removal of duplicate general meetings, additional share registers and that kind of administrative cost,” said Andrew Mackenzie, chairman of BHP Group. general Assembly.

“There’s also the important NPV benefit associated with structural redistribution of franking credits instead of them all going through DLC, that they go directly to limited shareholders.

“It will be in the billions of dollars.”

It will also enable shareholders to receive the franked dividend directly from the in-specie distribution of Woodside shares in the forthcoming spinout of BHP’s petroleum business to the Australian oil and gas producer.

The qualitative benefits will include “agility” to pursue opportunities going forward.

What does it mean for investors as a whole, and why does it matter to you even if you are not a BHP shareholder?

BHP makes up one tenth of the ASX 200

Many investments on ASX are not traded in companies, but in funds that are either directly linked to indices or index-based funds run by active managers.

Those who are tied to large indices like the S&P ASX 200 may not be overweight or underweight on certain stocks.

With the merger, all of BHP’s market value will come under the Australian banner, which will increase its share of ASX’s benchmark group from ~ 6% to 10%.

Since S&P has decided to let this happen in a single session on January 31, rather than over two separate sessions, as it considered at one point, this could lead to lots of volatility.

“Potentially, the bulk of the ASX 200 benchmark funds will be underweight BHP,” said Tribeca Investment Partners research director Todd Warren.

‘And they have to make some decisions whether they want that to still be the case. In that case, you are likely to see significant demand for BHP shares when and when that index change occurs at the end of the month. “

It could see billions move into BHP shares in a short time.

“It depends on when it occurs, it depends on how the indices or index funds tracking the ASX 200 rebalance, and it will depend on the rules associated with those index funds,” Warren said.

“Are they able to rebalance prior to an event, or do they have to wait for that event to occur before rebalancing?

“Either way … the estimates are something like the $ 10.5 to $ 11 billion of shares they need to change hands, which is six weeks’ volume or so, so that’s a pretty big move. And so yes, you can expect some strength in your stock price. “

More demand may come from card coverage from investors who shorted the Australian premium stocks ahead of the vote.

“The downside of it all is, of course, the PLC shareholders who will be relieved of their PLC shares and issued with Limited shares instead, which may be, if they have not already traded, some shares coming out as a result. “

Outside BHP, index fund reweighting is likely to cause volatility in other ASX 200 stocks to be traded in the rebalance.

Unification makes sense

Warren said Tribeca “did well” out of the poll after spending a long time on the UK PLC and short Australia in anticipation of the announcement.

But in addition, support from attorneys and investors for the collapse made sense, he said.

“To step back a bit from that, we were very supportive of the collapse, because honestly, you had essentially two companies trading under one banner, which clearly comes with a level of administrative burden and complexity that ultimately deteriorates. the value, “he said.

The move would mean less waste of franking credits on business transfers, as Mackenzie claimed, and make it easier for BHP to issue share buybacks.

But the broader goal is the availability of scrip for larger deals, something that was long anticipated by CEO Mike Henry.

It came into focus this week with reports that BHP could see a takeover or merger of a major mining company like Glencore, Freeport or Vale’s base metals.

Analysts are in doubt about them at the moment because of their scale, complexity and older issues, but Warren says BHP has made no secret of its desire to buy assets that could increase its exposure to ESG-friendly commodities associated with the decarbonization theme. .

In particular, BHP’s copper and nickel divisions need to be rebuilt after the company has prioritized them in recent years. With the development of the multi-billion dollar Jansen Potassium project now approved, it could also be keen that potassium chloride should have failed in a $ 40 billion bid for PotashCorp (now part of Nutrien) in 2010.

“What we have not really seen to date in this latest commodity bull market is major mining M&A, so it will happen,” Warren said.

“And I think whether it’s BHP and or others, we’re very much expecting the activity to continue, because it’s honestly still cheaper to buy than to build, and of course a whole lot easier.

“It is clear that the headlines around Rio and Jadar in Serbia today only serve to reinforce it.”

BHP (ASX: BHP) closed Friday with 4.81% as markets were wild despite higher commodity prices across the board, with materials from 3.52%.

Only gold miners avoided the divestment, with Northern Star (ASX: NST) up 1.03% to lead the large corporate sector.

BHP share price today:


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