BHP Billiton slams hedge fund Elliott’s proposals as ‘materially overstating’ potential upside

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BHP Billiton (BHP) launched on Wednesday a full-throated rebuttal of hedge fund Elliott's proposals for a wholesale structural overhaul of the Anglo-Australian mining giant.

Responding vociferously by means of a press release, conference call and presentation to the detailed letter and presentation sent from Paul Singer's activist fund to its board on Monday, BHP said that all of Elliott's proposals had been considered at length and had fallen short of warranting pursuit.

Elliott's key proposals had focused on unifying the dual-listing structure (DLC) across the U.K. and Australia into a single Australian entity, demerging and listing BHP's U.S. petroleum business and developing a consistent capital return program for shareholders.

"Elliott's proposals are not new to BHP. We have assessed in detail many times over past years options to unify the DLC structure and enhancements to our portfolio, including divestment of Petroleum. Consistent with our capital allocation framework, we regularly consider buybacks as an alternative use for our excess cash," began the press release.

"The Board and management have concluded that the costs and associated disadvantages of each element of Elliott's proposal would significantly outweigh the potential benefits. We believe that Elliott materially overstates the potential value that could be created by its proposals," the announcement continued, before breaking out the exact potential costs.

BHP estimated that unifying the DLC could destroy up to $1.3 billion in value while saving short of $2.5 million per year "for no identifiable material or strategic benefit".

Turning to petroleum, BHP asserted that the division remains core to its strategy and "has the potential to create significant long-term value at high returns".

In the press release, BHP also noted the $23 billion of buybacks enacted and $56 billion of dividends announced since the DLC was formed and emphasized that such capital return decisions "need to consider the cyclical nature of the resources industry and returns available from other uses of cash."

Andrew Mackenzie, Chief Executive Officer BHP Billiton speaks at the Minerals Week conference, Canberra on June 3, 2015.
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While the press release fell short of detailing an alternative plan for value creation for BHP shareholders, more attempts to address this were undertaken in Wednesday morning's investor call.

During this, management unveiled a "six pillar strategy" which consisted of pursuing improvements in terms of productivity, unlocking latent capacity, increasing rig count in U.S. onshore production, growth portfolio, other exploration, technology & innovation.

BHP shares were trading off by around 2.7 percent at 2pm London time against a FTSE 100 index that was broadly flat. However, the FTSE350 mining index was also around 2.5 percent lower given the slump in iron ore prices, so traders cautioned against reading too much of the effects of developments with Elliott into the share price reaction.

Elliott has a long track record of being an aggressive investor with the stomach to remain in situations for many years, as evidenced by its decade-plus long pursuit of fixed income capital owed to it from the Argentine government, which eventually saw it lock down around a 400 percent return on principal.

Few anticipate that this battle is anywhere near over, with expectations high among analysts and traders that the activist hedge fund will be back with a detailed response to BHP's stance very soon.

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