Financial market watchers have observed hedge fund Elliot Management’s boa constrictor-like tendencies when it latches on to its prey.
In this case its victim is BHP Billiton which Elliot accuses of being a mismanaged serial underperformer with a history of poor asset allocation.
In its previous activist investor forays Elliot has proved successful, drawing concessions from Samsung and claiming the scalp of Arconics chief executive Klaus Kleinfeld. As with BHP, Elliot invested in Samsung and Arconics, using its holdings as platforms on which to mount increasingly vociferous attacks on the companies’ managements and records, and demanding changes aimed at boosting share prices.
In its initial foray just over a month ago, Elliot targeted BHP’s dual-listed structure and suggested a spin-off and US float of the company’s US petroleum assets. In response BHP pointed to a cost of US$1.1bn to undo the dual-listed structure, along with various other criticisms of the Elliot proposals.
In recent days Elliot came back with another set of proposals, one of which tackles Treasurer Scot Morrison’s categorical statement that he wouldn’t allow BHP to have its main listing in the UK.
Elliot’s latest plan calls for an Australian domicile for the company. To unlock BHP’s latent value it proffers a wider menu of options for selling or disposing of the company’s petroleum business, citing the success of the South32 demerger.
In a move that will be hard for BHP to resist, bearing in mind the US$20bn plus it has wasted in buying and heavily investing in underperforming US shale assets, Elliot is calling for an independent review of the petroleum business. This would involve management, shareholders and outside experts with the results openly distributed.
Shortly after Elliot’s latest proposals, BHP chief executive Andrew Mackenzie spoke at a major conference in Barcelona where he unveiled a wide suite of measures – implemented and under investigation – that will turbocharge BHP’s returns.
He said that cost cutting, canny expansions and releases of latent capacity, better productivity in US shale, and better use of technology would lift the company’s output and returns. Implicitly, he conceded that a sale of US shale could be entertained, at the right price.
Where Elliot’s campaign goes from here is anyone’s guess. The firm’s ability to attract other major shareholders into its camp will be crucial, as will the possible arrival of other aggressive hedge funds on BHP’s share register.
For its part, BHP will hope that upcoming production and financial results reflect the optimism of Mackenzie’s Barcelona pitch.
Irrespective, there’ll be no loosening of Elliot’s boa constrictor coils for some time to come.