BHP chairman Jac Nasser and chief executive Andrew Mackenzie were in full charm-offensive mode at London's Royal Society of Chemistry last October when the world's biggest mining company threw its annual drinks for investors.
As some of the most powerful money managers in London hobnobbed with the likes of Glencore boss Ivan Glasenberg – there as a former BHP executive – and political strategist Lynton Crosby, BHP's top executives and board members gave a pretty good impression of a company in control of its own destiny.
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BHP half-year results
Mining giant BHP Billiton rewards shareholders with a bigger than expected dividend.
"Without going back too far, let's look at the last 10 years – starting with the ultimate indicator of the market," Nasser told the room.
"Despite the recent turmoil in commodity markets – our total shareholder returns for the last decade is up by over 100 per cent, compared to 69 per cent for the FTSE 100 and an average of 42 per cent for our major UK-listed peers."
Behind the scenes though, BHP was battling with one of the most formidable activist shareholders in the world.
New York-based Elliott Management, a $US32.7 billion hedge fund founded by billionaire Paul Singer, was demanding a radical overhaul of its business. By that October evening, which came a couple of months after Elliott had sent the resources giant a letter detailing its proposed changes, the miner had already held several meetings with the investor, trying and failing to dissuade it from pursuing the aggressive plan.
Public tussle
This week, their tussle spilled into the public as Elliott tried to force BHP's hand by publishing its demands. The firm wants BHP to spin off its US oil assets it values at $US22 billion.
Controversially, it also wants the company known as the Big Australian to ditch its dual sharemarket listings in Sydney and London in favour of a primary home on the London Stock Exchange.
Elliott would still keep BHP's headquarters in Collins Street, Melbourne, but the $122 billion group would be incorporated in Britain – a significant change with massive corporate and political implications.
Elliott claims the changes could boost shareholder value by about 50 per cent. The hedge fund, which has amassed a 4.1 per cent stake in the miner, wants BHP to return money to investors through buybacks. BHP has rejected the proposal, saying the costs and risks associated outweigh the benefits.
BHP's rebuff has set the stage for a potentially bitter fight between Australia's highest-profile company and a hard-nosed investor with a long history of protracted disputes with corporations and governments. Now, as Nasser eyes retirement, how he deals with the aggressive American firm will define his legacy as chairman.
Some support
Aspects of the proposal have already garnered support from some of BHP's shareholders, who had their dividend cut for the first time in 15 years in February as weaker commodities prices took their toll.
It's kind of surprising that Elliott have chosen BHP to be honest, there are probably more inefficient companies they could target.
Regal Funds Management's Julian Babarczy
"There's no way the market is ascribing enough value to BHP's petroleum business," says Craig Evans, portfolio manager of the global natural resources fund for Tribeca Capital, which holds BHP shares in both Australia and in Britain.
"There's definitely more that management could do with that and this move by Elliott should hopefully poke them into something more proactive."
Another BHP shareholder contacted by Fairfax expressed support for aspects of the Elliott proposal but would not comment publicly.
Revising BHP's structure "probably has some merit", Andy Forster, a senior investment officer at Argo Investments which owns BHP shares, told Bloomberg. But he said any change wouldn't be easy.
For Elliott, the argument is simple. "Despite the first-class quality of most of BHP's assets, BHP as an investment has underperformed," it said in the letter to the company's board. Most of that underperformance "has been driven by the incomplete status of management's streamlining and value-optimisation of BHP's group structure and asset portfolio", it said.
But Mackenzie is holding firm. On Wednesday, the Scottish-born chief said the company had "examined these suggestions many times before and we will continue to do so in relentless search of value". He added BHP is confident it has "everything in place to increase returns and significantly grow shareholder value".
It promises to be a fascinating battle.
Ruthless record
Elliott's founder, Singer, has a well-deserved reputation as a ruthless, aggressive agitator, who will not go quietly. Just ask Argentina's former president Cristina Fernandez de Kirchner, who was at the forefront of a 15-year-long legal battle between the country and a group of creditors led by Elliott.
The firm was a creditor during the country's debt default in the 1990s and refused a government offer to pay back only some of the money it owed bond investors. To get its money back, Elliott tried to seize an Argentine ship docked in Ghana in 2012 and the following year de Kirchner was forced to hire a commercial jet for an official trip to avoid the embarrassment of having her presidential plane impounded as Elliott led an effort to tie up Argentina's assets and force its political leaders to the negotiating table.
The dispute began in 2001, after Argentina defaulted on almost $US100 billion of privately owned debt. Sensing an opportunity to make profits during the country's financial meltdown, Elliott and a group of other hedge funds bought up Argentine bonds at a deep discount, planning eventually to sue for repayment of the bonds in full. De Kirchner described Singer and his team as "vultures" and "financial terrorists".
The case was finally settled last year and Elliott received $US2.4 billion, a 392 per cent return on the original value of the bonds, according to Argentina's economy ministry. Singer, who has built up an estimated personal fortune of $US2.2 billion, later thanked his employees for "persisting through this lengthy, complicated and contentious process".
A staunch conservative, Singer is one of the US Republican party's top financial donors, though he was a vocal opponent of Donald Trump during his presidential campaign. The 72-year-old, who founded the firm in 1977, is also a committed philanthropist and became an influential supporter of the gay rights cause after one of his sons came out.
Corporate targets
While Elliott has made fat profits by buying up sovereign debt of struggling countries, it has also pursued similar strategies with large corporations. Right now, as well as BHP, Elliott is also trying to force a shift in strategy at engineering group Arconic, technology giant Samsung Electronics, Marathon Petroleum and utility NRG Energy. At Arconic, it's aiming to oust chief executive officer Klaus Kleinfeld and replace four directors.
Sydney fund manager Perpetual, also a BHP shareholder, has experienced first hand how the disruptive activist shareholder can improve value and affect change within a company. In 2013, Elliott took a 4.5 per cent stake in Hess Corporation, an oil company listed on the New York Stock Exchange, and one that Perpetual was also invested in.
Almost immediately, Elliott began a forceful, public critique of the oil company's board composition, alleging poor management had kept Hess from maximising returns for shareholders.
After months of agitation, there was a drastic shake-up of the board and the share price reached highs of $US101 a share.
"They are good at seeing the greater sum of the parts than what the stock's been trading at," says Garry Laurence, portfolio manager of Perpetual's global fund, and in charge of the fund during that time.
"They're pretty active in letting companies know what they think and as a shareholder, they are very persistent." Laurence declined to say whether Perpetual supports Elliott's plan for BHP.
BHP fightback
BHP insiders argue their company is the wrong target and that Elliott's proposal, which was largely put together by the firm's Hong Kong office and spearheaded by portfolio manager James Smith, is fundamentally flawed.
Can Elliott Management’s candidate CEO truly serve the interests of $ARNC shareholders while on Elliott’s payroll? https://t.co/qEkwBLKp73 pic.twitter.com/gpVCEhAjaF
— Arconic (@arconic) April 12, 2017
They point to Elliott's demand that the new company be incorporated in England, continue to be a tax resident of Australia, and have a primary listing in London and a secondary listing in Australia.
It remains unclear how this complex proposal would win approval from the Foreign Investment Review Board, which requires BHP to be headquartered in Australia and listed on the ASX as "BHP Limited".
Indeed, BHP, advised by Goldman Sachs, argues unifying the dual-listed company structure could destroy at least $US1.3 billion in value to save less than $US2.5 million a year.
"It's kind of surprising that Elliott have chosen BHP to be honest, there are probably more inefficient companies they could target," says Julian Babarczy, head of Australian equities at Regal Funds Management.
"It seems to us that BHP have looked at these options many times before and they don't appear to add too much value for shareholders, especially those with a medium or long-term investment horizon.
"There doesn't seem to be anything new or revolutionary in what they've proposed."
First salvo
After a week of posturing, Elliott responded curtly to BHP's dismissal, issuing a statement on Thursday saying the company "misses the point".
"Management wants to maintain a legacy, value-distorting dual-listed company structure, retain unchanged within the group the clearly undervalued US petroleum business and, rather than adopt a yardstick of accretive capital return, would leave stranded a significant and growing balance of valuable tax credits," it said in a statement.
Others close to BHP believe Elliott knows its proposal – in its current form – will be difficult to sell to investors, regulators and Treasurer Scott Morrison.
"They [Elliott] are probably trying to light a fire under the company to see if anything catches," says one source close to the company who described Elliott as "the real deal".
"It could be the first salvo in a much longer battle where the proposal is revised and updated."
Now that Elliott has aired its grievances, the next step in its strategy will be to gather shareholder support. BHP shares, which jumped more than 4 per cent after the letter was initially made public, have retreated since, indicating some are unimpressed by the proposal. The stock is down 2 per cent over the week to Thursday's close, at $24.31.
The ball is now firmly in Elliot's court. While the company hasn't outlined a timeframe, it is likely to sound out further shareholders and put together another proposal for BHP.
"While Elliott has not always succeeded as an activist, it has more often than not succeeded as an investor," says Hasan Tevfik, equities strategist at Credit Suisse.
Indeed, market participants now expect more global shareholder activists to look towards Australian companies in a bid to extract further value.
"Since 2014 we have been anticipating the arrival of one of the global activists to Australia and we are not disappointed with their audacity," says Tevfik.
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