Stewart Bailey
Billiton is being tipped as the main beneficiary of its merger with Australian giant BHP, at least for the first year of their union.
Brokers also believe BHP management could have haggled harder in negotiations with Billiton to cut a better deal for their shareholders.
Australian broker Macquarie believes Billiton’s net current value will increase 14% in the first year, compared to only 2% for BHP. The two companies will merge, but for investment purposes access will be through either the Billiton or BHP tickers in Australia or London (and also New York or Johannesburg), due to the entity’s dual-listed company structure.
While the two shares will ultimately be equal, for the time being Billiton provides the cheaper access to the dual-listed company that is, until BHP completes its proposed buy-back of shares and sells its steel assets, valued at $3,6-billion.
The proceeds from the sale of the unfashionable steel business and the earnings-enhancing effects of the share buy-back will accrue to BHP shareholders only.
“That’s why BHP is trading at a bit of a discount to Billiton at the moment,” says one Johannesburg-based mining analyst.
Macquarie says BHP is likely to spin out its steel assets by the end of next year, while the buy-back of 5% of its shares will obviously take place if and when the right market conditions prevail. Macquarie expects that to be within 12 to 18 months.
The report also says that once the merger is approved directors of the group will consider whether to allow BHP shareholders to exchange some or all of their BHP shares for Billiton shares, although only “up to a limit of 10% of the issued share capital in BHP”.
But this could prove controversial, Macquarie says, as it could compromise a number of Australian shareholders who are restricted from investing offshore because of the index and liquidity implications of a shift from Australia to the United Kingdom.
BHP Billiton will have to be careful not to stir up the ire of Australian investors and regulators, who are already wary of the possibility that the merger is a veiled attempt to expatriate BHP from its Australian base.
The Australians will need little to get their backs up. While shareholders voted overwhelmingly in favour of the merger, there was an unmistakable undercurrent of dissatisfaction among sections of the BHP crowd, who feel their counterparts at Billiton got the better deal, and Macquarie would appear to agree. “From a BHP shareholder point of view, the only concern we have is that BHP might have been able to negotiate a more favourable merger ratio’ closer to our 64:36 percent net present value ratio.”
As things stand, stripping out the net effect of the proposed buy-back and the steel sale, the ratio is 60,5% BHP to Billiton’s 38,5%.
“Billiton benefits the most, with its post-merger share of the combined net present value rising by 14% … reflecting the addition paid by BHP. While the agreed merger ratio clearly favours Billiton, particularly in the short term, both companies benefit in the longer term,” Macquarie says.
The longer-term benefit would appear to be largely a function of the synergies created by the merger, demonstrated by the complementary performances of the commodities in each portfolio. This is also the reason that competition authorities will pose no threat to the transaction.
“Billiton’s relatively strong earnings growth forecast in the short term complements BHP’s earnings profile, which declines over the same period, mainly as a result of our forecast slump in the oil price and the strength of the Australian dollar,” says Macquarie.
“The combined earnings growth profile is therefore enhanced by the merger.”
ENDS