Value Release from Unification at BHP - February 2018 - Fixing BHP
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Value Release from Unification at BHP February 2018
FTI Consulting, Inc.
Mandate and Scope
FTI Consulting, Inc. (“FTI”) is a global consulting firm with approximately 4,600 professionals in 28 countries, including
Great Britain, Australia, South Africa and the United States. FTI’s common stock is listed on the New York Stock Exchange
and trades under the symbol “FCN”. FTI was retained by Elliott Advisors (HK) Limited (“Elliott”) to undertake an analysis
of and prepare an independent report on the efficacy, benefits and costs associated with the unification of BHP Billiton
Ltd (“Ltd”) and BHP Billiton Plc (“Plc” and together with Ltd, “BHP”).
FTI’s mandate in this matter was to examine the public claims and assertions made by both Elliott and BHP pertaining to
a proposed unification and to analyse the relevant qualitative and quantitative attributes of unification for BHP and its
shareholders. The scope of FTI’s work in this matter included the review of the presentations published by Elliott in April
and May 2017, as well as the response materials published by BHP in April 2017. In connection with the preparation of
this report, FTI conducted its own independent analysis based upon a number of sources, including: (a) publicly available
information and data pertaining to the question of whether shareholders of Ltd and Plc would derive value from a
unification of BHP’s dual listed company (“DLC”) structure implemented in 2001; (b) a review of Elliott’s underlying
analyses; and (c) research materials prepared by nine well-respected global investment banks and brokerages regarding
BHP and considerations relevant to the question of whether unification would provide incremental value to shareholders
of Ltd and Plc.
FTI received a fee from Elliott for the report that was appropriate to allow FTI to undertake suitable research and
analyses. The total amount of fees paid to FTI in connection with this report is not material in comparison to FTI’s total
annual revenues. In 2016, FTI had total revenues of US$1.81 billion.
2 Value Release from
Unification at BHP
Table of Contents
Executive Summary 4
Preamble 15
Economic and Strategic Barriers 20
Structure of Unification 33
Value of Unification 36
Costs of Unification 59
Impact of Unification 64
Appendix 75
3 Value Release from
Unification at BHPExecutive Summary
Value Release from
Unification at BHPExecutive Summary
Companies are Moving Away from the DLC Structure
1907-2005 1988-1999 1990-2001 1996-1999
15 companies utilised a DLC
structure in the past 25 years
1997-2000 1998-2000 2001-2006 2008-2009
8 companies have moved
away from the DLC structure
1930 1993 1995 2001
1 is actively moving towards a
US$173.2 billion US$49.1 billion US$102.9 billion US$126.2 billion
unified structure
2002 2002 2007
US$7.4 billion US$49.4 billion US$13.2 billion
5 Value Release from
Unification at BHPExecutive Summary
DLC Structure Limits BHP’s M&A Options
• Among other limitations, the DLC structure creates a significant impediment for M&A transactions
• Industry peers have used a mix of cash and stock for M&A transactions since 1995
• BHP has used only cash since becoming a DLC. DLC peers have used predominantly cash as well
Market Industry Benchmark DLCs BHP
37.5% 40.2% 0.5%
Stock 100.0%
62.5% 59.8% Stock 99.5% Stock
Cash Cash
Cash Cash
Total Market Oil & Gas and Mining
All Companies Sector Companies
6 Value Release from
Unification at BHPExecutive Summary
Economic and Strategic Barriers
Following the 2015 demerger of South32,
Plc No Longer Generates Sufficient Income to Fund Dividends
NOSH1 Operating Profit
100.0% 100.0%
9.2%
80.0% 38.5% 39.7% 80.0% 38.6%
60.0% 60.0%
90.8%
40.0% 40.0%
61.5% 60.3% 61.4%
20.0% 20.0%
0.0% 0.0%
2001 2017 2001 2017
Ltd Plc
• Plc only generated approximately 9% of BHP’s 2017 operating profit, but Plc’s shareholders still account
for 39.7% of BHP’s shareholder base
7 1. Number of Outstanding Share Holdings (“NOSH”) Value Release from
Unification at BHPExecutive Summary
Structural Alternatives for a Unified BHP
For BHP’s Situation, an Australian Top-Hat Structure Would Maximise Value
Current BHP: Ltd Acquisition: Australian Top-Hat Structure:
DLC Structure Unified BHP Ltd Unified BHP
“Ltd” “Plc” “Ltd” “Plc” “Ltd” “Plc”
Shareholders Shareholders Shareholders Shareholders Shareholders Shareholders
BHP Ltd Unified BHP
(ASX & LSE) (ASX & LSE)
DLC Merger DLC Merger DLC Merger
Sharing Agreement Agreement
Agreement Terminated Terminated
BHP Ltd BHP Plc BHP Plc BHP Ltd BHP Plc
(Australia) (UK) (delisted) (delisted) (delisted)
8 Value Release from
Unification at BHPExecutive Summary
Value of a Unified Structure
Organisational and financial benefits: Structural benefits:
• BHP can operate without the • A single Australian incorporated and
confines, complexity and opacity of Australian headquartered BHP
the DLC structure and agreements
• Eliminates price discrepancy
• Transparency and accountability between the two shares
• Cost reduction through removal • Primary listing on the ASX, premium
of duplicative functions listing on the LSE, maintaining other
listings on the JSE and NYSE, with a
• Improved capital/corporate unified shareholder base
structure allows:
• Greater M&A flexibility
• Simpler demergers
• Removal of structural barriers to
takeovers
9 Value Release from
Unification at BHPExecutive Summary
Costs of Unification
Direct Costs Unexplained Costs
• Transaction advisory fees According to BHP’s public
statements, management performs
• Stamp duties
a regular review of the DLC
structure, but have provided
limited details to the market:
• Estimated costs of US$1.3 billion to
unify (based on preliminary internal
analysis) without a detailed
explanation of content
• Annual cost synergies of only US$2.4
million but ignores key unification
benefits
10 Value Release from
Unification at BHPExecutive Summary
Value of a Unified Structure - Precedents for Releasing Value
If BHP were to unify, its shareholders can expect to realise a return on unification of 11.2%,
in line with precedent unifications
20.0%
+18.7% Share Price
Uplift1
15.0%
Share Price Uplift
+11.2% Share Price
10.0% Uplift
5.0%
0.0%
0% 10%
Unification 20% 30% 40% 50% 60% 70% 80% 90% 100%
Unification
Announcement Unadjusted Average Sector Adjusted Average Completed
Note: the X-Axis represents the time between unification announcement and unification completion
Share
24.2% Net of Index 9.9% Net of Index 7.7% Net of Index 12.5% Net of Index
Appreciation2
Share
Appreciation2 (0.1%) Net of Index 1.1% Net of Index 31.9% Net of Index 2.4% Net of Index
1. See slide 45 for additional detail
2. Average share price increase of both shares on a weighted basis using total shares outstanding, which is adjusted to remove the
11 respective industry index movements over the period of time between unification announcement and unification completion Value Release from
measured in US$ Unification at BHPExecutive Summary
Value of a Unified Structure
• Franking credits continue to accumulate at BHP, but the value of franking credits is only recognised by
shareholders upon distribution
BHP Build-Up of Franking Credit Balance Under the DLC Structure (US$ billions)1
$ 30
$ 25 Actual Forecast
$ 20
$ 15
$ 10
$5
$ -
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
2030
Franking Credit Balance
• Whilst returning capital through both dividends and off-market buy-backs are options already available to
BHP, the DLC structure significantly limits the release of value from franking credits
12 1. See slides 47-54 for discussion on franking credits and value release Value Release from
Unification at BHPExecutive Summary
Value Available to Shareholders Post-Unification
• The table below represents the net present value of unification benefits on a gross and net
(i.e. deducting what value would otherwise be released under the existing DLC) basis:
Net Present Value (US$ millions) Unification Unification
Total - DLC = Net of DLC
1 Enhanced Unification Return $ 14,135 - $ 14,135
2 Enhanced Capital Return Benefits:
Dividend Franking Credit Release 9,716 6,749 2,967
DSM use of Franking Credits1 - (1,701) 1,701
a Dividend Franking Credit Value Release $ 9,716 $ 5,048 $ 4,668
Franking Credit Value from Off-Market Share Buy-Backs 6,174 3,774 2,400
Shareholder Return from Off-Market Share Buy-Backs 3,887 2,276 1,611
b Off-Market Buy-Back Franking Credit Value Release $ 10,061 $ 6,050 $ 4,011
Total Enhanced Capital Return Benefits $ 19,777 $ 11,098 $ 8,679
Total Value $ 33,912 $ 11,098 $ 22,814
Costs to Achieve (391) - (391)
Total Net Present Value $ 33,521 $ 11,098 $ 22,423
13 1. DSM means Dividend Share Mechanism and is explained on slide 27 Value Release from
Unification at BHPExecutive Summary
Net Present Value of Unification Benefits to Shareholders
Value of Unification (US$ millions)
At Time of
Unification
+ $4,011 $(391) $22,423
$2,400 FC
+ $4,668 $1,611
Shareholder Value increase is
+ $14,135 b Return
equal to 18% of
a BHP’s current market
capitalisation
$126,208
Current Aggregate Enhanced Dividend Franking Off-Market Costs to Value of
Market Capitalisation Unification Return Credit (“FC”) Buy-Back Achieve Unification
(as of 19 January 2018) (11.2% Uplift) Value Release Value Release
1 2
14 Value Release from
Unification at BHPPreamble
Value Release from
Unification at BHPPreamble
Elliott published a report on increasing shareholder value at BHP in early April 2017.
Through several publicly disseminated investor presentations, Elliott and BHP have traded views on
how to build value:
• Elliott presentation – 10 April 2017 – Value unlock presentation
• Unification of Ltd and Plc
• Demerger and separate listing of petroleum business
• Adopting a consistent and optimal policy of capital return for shareholders
• BHP response – 12 April 2017 – Provided its views on all three Elliott areas of focus
• Unification – Costs outweigh benefits (based on preliminary internal analysis)
• Petroleum – Petroleum assets benefit group
• Capital Return – Buy-backs, while important, now is not the right time
• BHP stated that “Each of Elliott’s proposals could be implemented independently and the
merits of each should be addressed on a standalone basis.”
• Elliott presentation – 16 May 2017 – Focus on underperformance at BHP
• Disposal of shale and optimise value of the petroleum business
• Unify and return excess capital
• BHP press release – 16 May 2017 – BHP will review and formally respond
• There has been no response to date
16 Value Release from
Unification at BHPPreamble
Companies are Moving Away from the DLC Structure
1907-2005 1988-1999 1990-2001 1996-1999
15 companies utilised a DLC
structure in the past 25 years
1997-2000 1998-2000 2001-2006 2008-2009
8 companies have moved
away from the DLC structure
1930 1993 1995 2001
1 is actively moving towards a
US$173.2 billion US$49.1 billion US$102.9 billion US$126.2 billion
unified structure
2002 2002 2007
US$7.4 billion US$49.4 billion US$13.2 billion
17 Value Release from
Unification at BHPPreamble
Companies are Moving Away from the DLC Structure
• After fending off a recent hostile takeover attempt by Kraft Heinz, Unilever reviewed its
corporate strategy. On 28 November 2017, Unilever announced, amongst other findings,
that its board favoured unifying its DLC structure, which has been in place since 1930
28 November 2017 28 November 2017
“The complexity of the dual structure was cited by “Unilever said the board had
Graeme Pitkethly, Unilever finance director, as a reason determined that ‘unification with a
making it harder to spin off businesses, such as the single share class would be in the best
group’s margarines unit, which is being sold in an interests of Unilever and its
auction. It also makes it harder to undertake large deals shareholders,’ providing ‘greater
involving shares, though under Mr. Polman, Unilever ongoing strategic flexibility for value-
has preferred small acquisitions.” creating portfolio change.’”
18 Value Release from
Unification at BHPPreamble
Common Criticisms of the DLC Structure
1. Governance
• Corporate governance/management complexity
• Investor confusion
• Conflicts between the DLC entities
• Lacks transparency and accountability
2. Operational
• Cost redundancy
• Lower market visibility
• Limitation of synergies
3. Financial
• Share price discrepancies
• Limits level of index weighting and liquidity
• Hinders M&A activity
• Added complexity for corporate actions such as demergers and capital raising
19 Value Release from
Unification at BHPEconomic and Strategic Barriers
Value Release from
Unification at BHPEconomic and Strategic Barriers
A Historical Look at BHP
• BHP’s DLC structure was implemented in 2001 upon BHP’s merger with
Billiton when economic alignment of the Ltd and Plc entities reflected
their shareholder base. The 2001 split for NOSH and Operating Profit was
approximately 40% Plc and 60% Ltd
• Following the 2015 demerger of South32, only four substantive assets
remain in Plc – Antamina, Spence, Cerrejon and Mt Arthur – which
together generated only approximately 9% of BHP’s 2017 Operating Profit,
but Plc’s shareholders still account for approximately 40% of BHP’s
shareholder base
• Given the prescribed DLC equalisation ratio, as well as Plc’s relative size
and contribution, it is necessary for Ltd to support Plc by transferring cash
through the Dividend Share Mechanism (“DSM”) to fund dividends to Plc
shareholders
21 Value Release from
Unification at BHPEconomic and Strategic Barriers
Plc No Longer Generates Sufficient Income to Fund Dividends
NOSH Operating Profit
100.0% 100.0%
9.2%
80.0% 38.5% 39.7% 80.0% 38.6%
60.0% 60.0%
90.8%
40.0% 40.0%
61.5% 60.3% 61.4%
20.0% 20.0%
0.0% 0.0%
20011 2017 20011 2017
Ltd Plc
• Plc only generated approximately 9% of BHP’s 2017 operating profit, but Plc’s shareholders still
account for 39.7% of BHP’s shareholder base
• If BHP conducts Ltd only buy-backs, the economic misalignment of NOSH versus Operating
Profit will increase, furthering the use of the DSM and lost franking credit value
1. Per BHP’s Proposed DLC Merger Explanatory Memorandum, number of shares outstanding are as of 9 April 2001, and
22 operating profit is as of fiscal year ended 30 June 2000 Value Release from
Unification at BHPEconomic and Strategic Barriers
DSM Effect Since the South32 Demerger
• US$2.4 billion transferred from Ltd to Plc through the DSM1
• US$1.0 billion of valuable franking credits have been lost due to the DSM1
23 1. BHP paid a dividend in September 2017 that is not reflected in the numbers above. See further explanation on slide 28 Value Release from
Unification at BHPEconomic and Strategic Barriers
Plc Trades at a Discount to Ltd
• The DLC structure requires BHP to be operated as a single economic entity and that shareholders
receive equivalent economic returns
• Since the inception of the DLC, Plc’s share price discount has been 10% on average with a standard
deviation of 5%
• Since 2004, BHP has completed four off-market and three on-market share buy-back programs
• The South32 Demerger occurred in May 2015
Discount of Plc to Ltd (%) and Timing of Buy-Backs (US$ millions)
10%
US$409 US$6,002 US$3,677
5% South32
Demerger
0% Normalised Ltd
Share Price
−5% +1 STDV
−10% Average
Discount (10%)
−15% −1 STDV
−20%
US$1,600
US$1,780 US$2,817 US$6,340
−25%
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
July July2
Plc Buy-Back Time Period1 Ltd Buy-Back Time Period1
1. The buy-back information is from BHP’s website
24 2. Share price data has been extended through to 19 January 2018
Value Release from
Unification at BHPEconomic and Strategic Barriers
Franking Credits Explained
• Franking credits were introduced to prevent double taxation of dividends in Australia
• Australian tax resident companies can record the tax paid (typically at the corporate income tax rate of
30%) as franking credits
• The company can attach those franking credits to dividends and other frankable distributions (such as
off-market buy-backs)
• Franking credits can be used by Australian tax-resident shareholders to offset their own Australian tax
liability. In general, non-corporate shareholders (including individuals and superannuation funds) are
entitled to a refund from the Australian Tax Office (“ATO”) to the extent their franking credits exceed
their Australian tax liability
PROFIT AU$100
Corporate Tax
AU$30
Company
Franking The grossed-up dividend
Dividend Credits including franking credits
AU$70 AU$30 equals AU$100
ATO
Taxes/Refund
Shareholder
25 Value Release from
Unification at BHPEconomic and Strategic Barriers
Growing Balance of Franking Credits
• FYE2017 franking credit balance of US$11.4 billion, which would have been US$12.4 billion without
the loss of credits through the DSM
• The DSM was established in 2015 as a response to the South32 demerger and to allow liquidity to
transfer from Ltd to Plc
• Since 2015, US$2.4 billion in fully franked dividends have been transferred to Plc causing the drop in franking
credit balance as the franking credits could not be monetised by any BHP shareholders
• Franking credits are generated at a rate of 30% of income generated in Australia
• Franking credits are growing at an increasing rate relative to BHP’s book value – a trend which
continues under the DLC structure
Franking Credit Balance (US$ millions)
$ 15,000 25.0%
$ 12,000 20.0%
$ 9,000 15.0%
$ 6,000 10.0%
$ 3,000 5.0%
$ - -
2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017
Franking Credit Balance (LHS) Franking Credit Balance as % of Book Value of Equity (RHS)
26 Value Release from
Unification at BHPEconomic and Strategic Barriers
Dividend Share Mechanism Explained
• Dividend Share Mechanism – dividends are paid by Ltd to move distributable profits from Ltd to
Plc, so that Plc can issue matching dividends to its shareholders per the DLC agreements, which
results in significant losses of valuable franking credits
Ltd Plc
DSM
Dividend
Franking
Credits
Dividend DSM
Dividend
Franking
Credits
Lost
Predominantly Australian Predominantly
Tax-Resident Investors International Investors
27 Value Release from
Unification at BHPEconomic and Strategic Barriers
Lost Franking Credits are Expected to Continue Under the DSM
• The cumulative payment of dividends through the DSM has been US$2.4 billion through 2017.
Dividends distributed to Plc were fully franked and attached franking credits totalling US$1.0 billion,
which could not be monetised by any BHP shareholders
• Based on future dividend expectations and analyst consensus forecasted income, Plc will require
additional funds as it is not likely to be in a position to fund dividends through its own earnings and
liquidity
Cumulative DSM Usage to Support Plc and
the Resulting Loss of Franking Credits (US$ millions)
$1,990 $2,430
$853 $1,041
2016 20171
Cumulative DSM Transfer Cumulative Loss of Franking Credits
28 1. The September 2017 dividend is not included in the DSM usage chart above as 2017 represents the fiscal year ended 30 June Value Release from
Unification at BHPEconomic and Strategic Barriers
Historical Buy-Backs have Returned Suboptimal Value
• As a result of the DLC structure, management has historically undertaken share buy-backs in
proportion to the respective numbers of shares outstanding at Plc and Ltd, but the buy-backs have
not achieved optimal value for shareholders
• Since Ltd off-market share buy-backs can be undertaken at up to a 14% discount to market price, as
a matter of economic and commercial logic, BHP should only repurchase Plc shares if Plc’s share
price is at a discount of greater than 14% to Ltd’s share price
• Any buy-back programme that results in more Ltd shares than Plc shares being repurchased by BHP
would significantly exacerbate the shareholder base imbalance and Plc’s dividend gap
Percentage Breakdown of Number of Shares Bought Back
Plc’s market discount to Ltd at
− 2% − 8% − 7% − 17% time of buy-back announcement
100%
90% 16%
80% 39% 39%
70% 63% Percentage of Shares
60% Bought Back in Plc
50% 100%
40% 84% Percentage of Shares
30% 61% 61% Bought Back in Ltd
20% 37%
10%
0%
2004
2004Buy-Back
Buyback First Half of 2006 Second Half of 2010 to 2011 Cumulative
Buyback
Buy-Back 2006 to 2007 Buyback
Buy-Back
29 Buyback
Buy-Back Value Release from
Unification at BHPEconomic and Strategic Barriers
DLC Structure Limits BHP’s M&A Options
• Based on our in-depth research and analysis of M&A transactions, it is clear that virtually all M&A
transactions since 1995 by companies with a DLC structure were completed using cash
Market M&A Activity1,2 DLC M&A Activity1,2,3
37.5% 0.5%
62.5% Stock Stock
Cash 99.5%
Cash
Market transaction value:4 Market transaction value:4
US$36.3 trillion US$178.5 billion
• This contrasts with the broader market, which uses stock to fund 37.5% of M&A consideration –
providing evidence of the structural impediment created by DLC structures
1. This percentage is based on completed transactions from 1 January 1995 to 31 October 2017 where (i) the acquirer is not a financial sponsor, (ii) the acquirer’s initial stake in the target is
less than 20% (to exclude privatisations) and (iii) the acquired stake of the target is 50% or more post-transaction. Where a combination of cash and stock is given as consideration,
transaction value is split based on the combination of cash consideration versus stock consideration
2. The split between cash and stock value is determined by transaction value (as opposed to number of transactions to avoid overweighting of insignificant transactions within the data)
3. The DLC cash vs. stock split excludes the Fortis / Generale de Banque transaction in 1998 because it was part of a series of corporate
30 reorganisations
Value Release from
Unification at BHP
4. Market transaction value only considers the cash and stock portions of the considerationEconomic and Strategic Barriers
DLC Structure Limits BHP’s M&A Options
• Industry peers have used a mix of cash and stock for M&A transactions
• On the other hand, since 2001 when the DLC began, BHP has only used cash for M&A transactions
Industry M&A Activity1, 2 BHP M&A Activity as a DLC2
40.2% 100.0%
Stock Cash
59.8%
Cash
Oil & Gas and Mining
BHP
Sector Companies
Market transaction value:3 Market transaction value:3
US$3.0 trillion US$33.3 billion
1. This percentage is based on completed transactions by Oil & Gas and Mining Sector companies from 1 January 1995 to 31 October 2017 where (i) the acquirer is not a financial sponsor, (ii)
the acquirer’s initial stake in the target is less than 20% (to exclude privatisations) and (iii) the acquired stake of the target is 50% or more post-transaction. Where a combination of cash
and stock is given as consideration, transaction value is split based on the combination of cash consideration versus stock consideration
2. The split between cash and stock value is determined by transaction value (as opposed to number of transactions to avoid
31 overweighting of insignificant transactions within the data) Value Release from
3. Market transaction value only considers the cash and stock portions of the consideration
Unification at BHPEconomic and Strategic Barriers
DLC Structure Limits M&A Options
• BHP’s previous acquisitions of US shale assets, Fayetteville and Petrohawk, entirely for cash as a
result of the DLC structure (rather than a combination of stock and cash in line with industry
sector M&A norms) resulted in an illustrative additional value loss of US$2.5 billion
Illustrative Additional Value Loss from Using 100% Cash
for the Petrohawk and Fayetteville Acquisitions (US$ millions)
$20,000
37.0% value loss
$16,000 40.2% US$2,512 million
Stock $6,784 value loss
$12,000 $4,272
$8,000 $16,871
59.8%
$4,000 Cash $10,087 $10,087
$0
Cash Only Combination1,2 Combination2,3
(2011 bid) (2011 bid) (Current stock price)
• This comparison is based on the M&A norms within the Oil & Gas and Mining Sector companies by
using consideration of 59.8% cash1 and 40.2% stock1,2
1. The percentages represent the Oil & Gas and Mining Sector companies market transaction split from slide 31. This percentage is based on completed
transactions by Oil & Gas and Mining Sector companies from 1 January 1995 to 31 October 2017 where (i) the acquirer is not a financial sponsor, (ii) the acquirer’s
initial stake in the target is less than 20% (to exclude privatisations) and (iii) the acquired stake of the target is 50% or more post-transaction. Where a
combination of cash and stock is given as consideration, transaction value is split based on the combination of cash consideration versus stock consideration
32 2. On the basis of BHP issuing stock from Ltd and Plc utilising a 60%/40% split Value Release from
3. As of 19 January 2018 Unification at BHPStructure of Unification
Value Release from
Unification at BHPStructure of Unification
Steps to Achieve Unification
Alternatives for Unification
• The unification of the DLC can be undertaken in two permissible ways to create a unified BHP
• Option 1: Australian Top-Hat Structure
• Option 2: Ltd Acquisition of Plc
Key Approvals for Unification
• Shareholder approval by each of the Ltd and Plc shareholder bases
• Relevant court approval(s) for applicable scheme(s) and approvals from UK and Australian
tax and regulatory authorities as needed
• Listing approvals from the UK Listing Authority, ASX, JSE and NYSE
34 Value Release from
Unification at BHPStructure of Unification
Structural Alternatives for a Unified BHP
• For BHP’s situation, an Australian Top-Hat structure would maximise value
• The Australian Top-Hat structure for unification is utilised in preparation of this report
Current BHP: Ltd Acquisition: Australian Top-Hat Structure:
DLC Structure Unified BHP Ltd Unified BHP
“Ltd” “Plc” “Ltd” “Plc” “Ltd” “Plc”
Shareholders Shareholders Shareholders Shareholders Shareholders Shareholders
BHP Ltd Unified BHP
(ASX & LSE) (ASX & LSE)
DLC Merger DLC Merger DLC Merger
Sharing Agreement Agreement
Agreement Terminated Terminated
BHP Ltd BHP Plc BHP Plc BHP Ltd BHP Plc
(Australia) (UK) (delisted) (delisted) (delisted)
35 Value Release from
Unification at BHPValue of Unification
Value Release from
Unification at BHPValue of Unification
Unification Yields Benefits
Organisational and financial benefits: Structural benefits:
• BHP can operate without the confines, • A single Australian incorporated and
complexity and opacity of the DLC Australian headquartered BHP
structure and agreements • Eliminates price discrepancy between
• Place all shareholders on an equal, standalone the two shares
footing, eliminating the DSM
• Primary listing on the ASX, premium
• Focus on core operations and optimised
returns/value rather than dividend equalisation
listing on the LSE, maintaining other
pressures listings on the JSE and NYSE, with a
• Equalisation of economic and voting rights
unified shareholder base
• Elimination of contractual/legal agreements
(joint electorate actions, class rights action and
cross guarantees)
• Cost reduction through removal of
duplicative functions
• Improved capital/corporate structure
allows:
• Greater M&A flexibility
• Simpler demergers
• Removal of structural barriers to takeovers
37 Value Release from
Unification at BHPValue of Unification
The Experience of Other Unified DLCs
Industry Engineering Financial Financial Financial
Countries Switzerland/Sweden Belgium/France Sweden/Finland Switzerland/UK
Pre-Unification Split 50% ABB AG & 50% Dexia Belgium & 60% Nordbanken & 57% Zurich Allied &
50% ABB AB 50% Dexia France 40% Merita 43% Allied Zurich
Unification Structure Top-Hatting with a new Swiss entity Dexia Belgium acquired Dexia France Nordbanken (Swedish company) acquired Top-Hatting with a new Swiss entity
Merita
Post-Unification Swiss, Stockholm, Frankfurt and London Brussels, Paris and Luxembourg Exchanges Stockholm, Helsinki and Copenhagen Swiss and London Exchanges
Listings Exchanges Exchanges
DLC Start Date and 1988 - 1999 1996 - 1999 1997 - 2000 1998 - 2000
Unification Date
Time From ~5 months ~2 months ~4 months ~6 months
Announcement to
Unification
Share Appreciation1 28.9% Share Return 15.5% Share Return 5.1% Share Return 5.2% Share Return
- 4.7% STOXX Industrials Index - 5.6% STOXX Banks -(2.6%) STOXX Banks -(7.3%) STOXX Insurance
24.2% Net Index 9.9% Net Index 7.7% Net Index 12.5% Net Index
Credit Rating Update • No change • Declining guidance • Improving guidance • Improving guidance
After Unification
Costs • No taxation at Company level • Not available • Not available • Not available
1. Average share price increase of both shares on a weighted basis using total shares outstanding, which is adjusted to remove the
38 respective industry index movements over the period of time between unification announcement and unification completion Value Release from
measured in US$ Unification at BHPValue of Unification
The Experience of Other Unified DLCs
Industry Financial Oil & Gas Industrials Financial and Information Services
Countries Belgium/Netherlands Netherlands/UK Australia/UK Canada/UK
Pre-Unification Split 57% Fortis (B) Belgian entity & 60% Royal Dutch & 59% Brambles Industries Ltd & 78% Thomson Reuters Corp &
43% Fortis (NL) Dutch entity 40% Shell Transport 41% Brambles Industries Plc 22% Thomson Reuters PLC
Unification Structure Stapled share – twinned the two Top-Hatting with a new UK entity Top-Hatting with a new Australian entity Canadian entity acquired UK entity
individuals shares
Post-Unification Euronext Brussels, Amsterdam and Amsterdam, London and New York Sydney and London Exchanges Toronto and New York Exchanges
Listings Luxembourg Exchanges Exchanges
DLC Start Date and 1990 - 2001 1907 - 2005 2001 - 2006 2008 - 2009
Unification Date
Time From ~3 months ~9 months ~12 months ~3 months
Announcement to
Unification
Share Appreciation1 9.6% Share Return 17.4% Share Return 52.0% Share Return 16.1% Share Return
-9.7% STOXX Insurance - 16.3% STOXX Oil & Gas - 20.1% S&P/ASX200 Industrials -13.7% BI Global Information Services
(0.1%) Net Index 1.1% Net Index 31.9% Net Index 2.4% Net Index
Credit Rating Update • Improved rating • No change • Fitch improved rating B- to B • Moody’s improved rating A1 to Aa3
After Unification
Costs • Unification was realised with exemption • US$115 million, which included • US$45 million costs or expenses • Not available
from income tax in Belgium for Fortis “investment banking, legal and • US$29 million stamp duty
(B), Fortis SA/NV and Fortis Brussels registration expenses” • Total after-tax cost of restructuring and
• EUR 861,000 capital tax due on issue • No material liability for corporate tax or unification across FY06 and FY07 was
price of the shares in Fortis (NL) stamp duty US$144 million includes costs
associated with divestments
1. Average share price increase of both shares on a weighted basis using total shares outstanding, which is adjusted to remove the
39 respective industry index movements over the period of time between unification announcement and unification completion Value Release from
measured in US$ Unification at BHPValue of Unification
Unification Yields Benefits1
• Enhance liquidity and increase • Single stock market listing • Dividend flows and capital structuring • Enhances strategic flexibility
financial flexibility; can finance • Clearly defined operating organisation simplified as cash will pass through the • Simplifies capital raising
strategic acquisitions with both debt • Simplified organisation and ensures structure more directly and rapidly • Reduces complexity for investors and
and equity greater coherence and transparency • Removes pricing difference between analysts
• Single-class share structure provides a the two shares • Increases the liquidity of new Zurich
more transparent way to compare to • New group able to issue shares more Financial Services shares
peers, making it easier for easily • Removes pricing difference between
shareholders, investors and the • More transparent for the financial the two shares relative to the values
Company markets implied by the Equalisation Ratio
• Broaden the shareholder base • Concentration of trading in a single
share should improve liquidity
• A single share may lead to inclusion of
the share in additional indices
• Improved stock market visibility • Increased clarity and simplicity of • Elimination of the complexity of the • Consolidated and improved trading of
• Enhanced liquidity of shares governance DLC Structure would allow for the shares
• Increased weighting in the principal • Increased management efficiency focus on core businesses • Simplified capital structure
share indices will lead to additional • Increased accountability • Increase in index weighting via a • Single, global and deep pool of
demand for Fortis shares • Flexibility in issuing equity and debt concentration of Brambles’ capital in a liquidity
• Each shareholder will be able to single market, the ASX • Removes pricing difference between
choose to receive either a wholly • Removes pricing difference between the two shares
Belgian or wholly Dutch dividend the two shares
• Reduce complexity and costs
• Provide greater strategic flexibility
40 1. The benefits of unification are as discussed from the various companies’ unification and other corporate documents Value Release from
Unification at BHPValue of Unification
Brambles Case Study – Remarkable Similarities
DLC Type Plc-Ltd separate legal entities Plc-Ltd separate legal entities
DLC Merger Date Announced April 2001 Announced March 2001
Unification Structure A new Australian holding company A new Australian holding company could
established in 2006 to acquire both Plc be established to acquire both Plc
and Ltd – Top-Hat structure and Ltd – Top-Hat structure
Post-Unification Primary listing – ASX Primary listing – ASX
Listings
Other listing – LSE Premium listing – LSE
Other listings – JSE and NYSE
Countries of 44 at the time of unification 31 per the BHP Annual Report 2017
Operations
Plc/Ltd Share Capital 41% Plc / 59% Ltd (immediately prior to 40% Plc / 60% Ltd (currently)
Split unification)
41 Value Release from
Unification at BHPValue of Unification
Brambles Case Study – Remarkable Similarities
Costs of Unification UK stamp duty of US$29.0 million plus Estimated UK and Australian stamp duty of
estimated transaction advisory fees of US$286.5 million plus estimated transaction
US$45.0 million advisory fees of US$104.6 million1
Financial Advisors • Greenhill • JP Morgan
• Macquarie • Dresdner Kleinwort Wasserstein
• UBS • Gresham Partners
• UBS
Legal Advisors • Allens • Allens
• Freshfields Bruckhaus Deringer • Freehills
• Mallesons Stephen Jacques • Linklaters
• Clifford Chance • Slaughter and May
• Skadden, Arps, Slate, Meagher & Flom • Sullivan & Cromwell
• Slaughter and May
• Sullivan & Cromwell
Headquarters Sydney, Australia Melbourne, Australia
42 1. See additional detail on slides 61 and 62 Value Release from
Unification at BHPValue of Unification
Brambles Case Study – Remarkable Similarities
Unification rationale:1
• Better operational focus on key business units by reducing the complexity
of the DLC structure
• Upweighting in key stock market indices
• Elimination of the historical share price difference between Brambles
Industries Plc and Brambles Industries Ltd
• Common equity currency for use in M&A activity
• Opportunity to engage in restructuring business portfolio
• Reduce costs with simplified structure
• Aggregate liquidity for purposes of engaging in share buy-backs
43 1. The benefits of unification are as discussed from Brambles’ unification and other corporate documents Value Release from
Unification at BHPValue of Unification
Brambles Case Study – Increased ASX200 Weighting
57%
increase
1.9%
1.2%
Brambles Industries Ltd Brambles Ltd
Pre-Unification Post-Unification
As of 1 December 2006, when the ASX200 re-weighted
44 Value Release from
Unification at BHPValue of Unification
Precedents for Releasing Value
Unification Value Premium
20.0%
+18.7% Share Price
Uplift
15.0%
Share Price Uplift
+11.2% Share Price
10.0% Uplift
5.0%
0.0%
Unification Unification
Unadjusted Average Sector Adjusted Average
Announcement Completed
Note: the X-Axis represents the time between unification announcement and unification completion
Share 28.9% Share Return 15.5% Share Return 5.1% Share Return 5.2% Share Return
Appreciation1 - 4.7% STOXX Industrials Index - 5.6% STOXX Banks -(2.6%) STOXX Banks -(7.3%) STOXX Insurance
24.2% Net of Index 9.9% Net of Index 7.7% Net of Index 12.5% Net of Index
Share 9.6% Share Return 17.4% Share Return 52.0% Share Return 16.1% Share Return
Appreciation1 -9.7% STOXX Insurance - 16.3% STOXX Oil & Gas - 20.1% S&P/ASX200 Industrials -13.7% BI Global Information Services
(0.1%) Net of Index 1.1% Net of Index 31.9% Net of Index 2.4% Net of Index
1. Average share price increase of both shares on a weighted basis using total shares outstanding, which is adjusted to remove the
45 respective industry index movements over the period of time between unification announcement and unification completion Value Release from
measured in US$ Unification at BHPValue of Unification
Releasing Value at BHP
• If BHP were to unify, its shareholders can expect to realise a return on unification of
11.2%, in line with precedent unifications
BHP market cap of US$126.2 billion × 11.2% = US$14.1 billion or US$2.66 per share
• Of the comparable unification precedents, Brambles most closely resembles BHP, as it
is the only UK Plc – Australian Ltd unification. If BHP were to unify and experience
returns in line with those of Brambles on unification, BHP shareholders would realise a
return on unification of 31.9%
BHP market cap of US$126.2 billion × 31.9% = US$40.3 billion or US$7.56 per share
46 Value Release from
Unification at BHPValue of Unification
Maximise Release of Franking Credits
There are two primary ways to release franking credits: distributing dividends or undertaking off-
market share buy-backs. Off-market buy-backs are the more valuable of the two
Distribution of Dividends Off-Market Share Buy-Backs
• While discretionary in nature, shareholders • Discounted off-market buy-backs which attach
often expect to receive returns via dividends franking credits allow investors to whom
franking credits are most valuable to tender
• The value of dividends is higher to Australian their shares into the buy-back to optimise the
shareholders due to franking credits release of franking credits
• The value of franking credits is only released • There is also a significant additional capital
on distribution benefit that varies depending on the
shareholder’s cost basis
• Non-tendering shareholders also benefit from
the shareholder return driven by unified BHP
reducing the number of shares in issue at a
discounted buy-back price
47 Value Release from
Unification at BHPValue of Unification
Value of a Unified Structure
• Franking credits continue to accumulate at BHP, but the value of franking credits is only
recognised by shareholders upon distribution
BHP Build-Up of Franking Credit Balance Under the DLC Structure (US$ billions)
$ 30
$ 25 Actual Forecast
$ 20
$ 15
$ 10
$5
$ -
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
2030
Franking Credit Balance
• Whilst returning capital through both dividends and off-market buy-backs are options already
available to BHP, the DLC structure significantly limits the release of value from franking credits
48 Value Release from
Unification at BHPValue of Unification
Sufficient Free Cash Flow to Return Capital to Shareholders
• BHP will continue to generate excess free cash flows after capex sufficient to fund dividends and
planned buy-backs
• Remaining cash flows can be used to pay down debt. Cash balance could exceed total debt by 2022
Forecast of Excess Free Cash Flow (US$ billions)
$ 30 $ 30
$ 25 $ 15
$ 20 $ -
$ 15 $ (15)
$ 10 $ (30)
$5 $ (45)
$ - $ (60)
2018 2020 2022 2024 2026 2028 2030
Excess Free Cash Flows (LHS) Dividends (LHS)
$16B in Buy-Backs (LHS) $10B in Buy-Backs from Sale of Shale (LHS)
Capex (LHS) Net Debt | (Cash) (RHS)
Target Net Debt (RHS)
49 Value Release from
Unification at BHPValue of Unification
Release of the Franking Credit Balance
• Under the DLC structure, the franking credit balance could grow to US$25 billion by 2030
• Unification would enable accelerated monetisation of the growing stockpile of franking credits
Forecast of Franking Credit Balance (US$ billions)
$ 30
Actual Forecast
$ 25
US$4B
$ 20
US$7B
US$18B
$ 15
US$7B
$ 10
Net franking credit
$5 balance under a
unified structure
$ -
2030
2001 2003 2005 2007 2009 2011 2013 2015 2017 2019 2021 2023 2025 2027 2029
Franking Credit Release from $10B in Buy-Backs from Sale of Shale Franking Credit Release from $16B in Buy-Backs
Franking Credit Release from Dividends Franking Credit Balance
Franking Credit Balance under DLC Structure
50 Value Release from
Unification at BHPValue of Unification
Expert Valuation Range for Franking Credits
• The value of franking credits, when distributed to shareholders, is based upon the extent to which
they can be utilised by eligible recipients
• Published expert reports provide reliable third party estimates of the value of franking credits,
which in some cases are referenced in value ranges
• Below is a summary of expert studies on franking credit value which indicate a value of AU$0.47
on the dollar of distributed franking credits (within a range of AU$0.35 to AU$0.60 on the dollar)
Value of Franking Credits by Expert Third Party Studies1
2016 Frontier Economics AU$0.35
2016 Capital Financial Consultants AU$0.60
2013 Economic Regulation Authority AU$0.45
2010 Minney AU$0.40
2006 Beggs and Skeels AU$0.57
2004 Hathaway and Officer AU$0.45
Average: AU$0.47
1. Frontier – “An Updated Dividend Drop-off Estimate”, Prof. Stephen Gray, September 2016, Frontier Economics Pty, Ltd. Capital – “Gamma and The Act Decision”, Dr. Martin Lally, Capital
Financial Consultants, 23 May, 2016. Economic – “Estimating the Market Value of Franking Credits in Australia”, September 2013, Duc Vo, Economic Regulatory Authority. Minney – “The
Value of Franking Credits to Investors”, Aaron Minney, The Finsia Journal of Applied Finance, 2010. Beggs and Skeels – “Market Arbitrage of Cash Dividends and Franking Credits”, David J
Beggs and Christopher L. Skeels, Department of Economics The University of Melbourne, September 2006. Hathaway – “The Value of Imputation Tax Credits”, Neville Hathaway and Bob
Officer, November 2004, Capital Research Pty Ltd.
51 Value Release from
Unification at BHPValue of Unification
Quantifying the Value of Franking Credits
Dividend Drop-Off Valuation Methodology:
• Dividend drop-off studies provide an empirical and reliable means to estimate franking credit value
• In relation to payment of dividends, the share price drops concurrently as the shares go ex-
dividend and this drop is a reflection of that dividend’s value
• The extent to which the share price change is greater for a franked dividend compared to a non-
franked dividend implies the value of the franking credits attached to the franked dividend
• The dividend drop-off study conducted by FTI is based on over 3,200 drop-off observations among
existing S&P/ASX200 companies since July 2002
ASX
Dividend Drop-Off Summary Adjusted
On average – the decline in share price was equivalent to
Franked dividend drop-off as % of total dividends 95.1% 95.1% of the dividend’s value, compared to 75.9% for
unfranked dividends
Unfranked dividend drop-off as % of total dividends 75.9% The 19.2% difference between the two shows the implied
value of franking credits i.e., the market pays AU$0.19 more
Difference 19.2% for the AU$0.429 of franking credit attached to each
AU$1.00 of fully franked dividend
AU$1.00 dividend = AU$0.429 of franking credit1 AU$0.43
Therefore, the market attributes a value to each distributed
Value of Franking Credits (difference/AU$0.429) AU$0.45 AU$1.00 of franking credit of AU$0.45 (19.2% divided by
42.9% x AU$1.00)
52 1. Franking credit value is equal to corporate tax rate (30%) divided by (100%-30%) = AU$0.429 Value Release from
Unification at BHPValue of Unification
Shareholder Composition1 – A Key to Releasing Franking Credit Value
• More shares in the hands of Australian tax residents results in increased utilisation of franking credits
• The result of this analysis is that we expect a ~46% increase in the number of BHP shares held by Australian tax residents over
time following unification, in accordance with the charts below:
Unified BHP Unified BHP
Pre-unification
Ltd (Immediately Upon (Following
(Plc and Ltd)
Unification) Unification)4
21.3% 24.0% 30.3%
31.3% 35.3% 39.6%
58.4% 55.7%
20.3% 20.3%
33.4% 30.1%
Total Shares: 3.2 billion 5.3 billion 5.3 billion 5.3 billion
Australian Domiciled: 2.2 billion 2.2 billion 2.4 billion 3.2 billion
% of Total: 68.7% 41.6% 44.3% 60.4%2
Australian – Funds3 Australian – Retail3 International3
1. Refer to the Impact of Unification slides 64-72
2. If the retail shareholder base remains static at 20.3% of the total shares outstanding post-unification, then 49.6% of the total unified BHP shares would be held by Australian tax residents
3. Calculation of beneficial shareholders is prepared based on the report and analysis of a shareholder proxy advisory firm who reviewed the relevant underlying composition of the registered
holders reported by BHP in its shareholder register. FTI utilised this analysis as a proxy for Australian domiciled share ownership
53 4. The timing of uplift in the shareholder base occurs within three years after unification
Value Release from
Unification at BHPValue of Unification
Value of Franking Credits – Off-Market Buy-Backs
The value of franking credits released via discounted off-market buy-backs
• Discounted off-market buy-backs which attach franking credits allow investors to whom franking
credits are most valuable to tender their shares into the buy-back to optimise franking credits
• A further capital benefit can be achieved that is unique to the specific investor’s circumstances
• Australian tax residents can utilise franking credits in their entirety to either off-set or reimburse
their tax liability
Illustrative Value of Off-Market Buy-Back (US$) • Based on the expected
$0.42 accounting for share capital
$8.86
upon unification, common
Capital $29.96
(14.0%) Component
22.1% Return control transactions like
US$5.42 per unification can utilise the
$24.54 ($0.42) share
pooling of interests method, so
Buy- $21.10 Capital $20.68 Franking share capital component
Back Component Credit
Discount Grossed Up (US$0.42) at unified BHP
would remain effectively
unchanged post-unification
• ATO class rulings on the matter
over the past ten years support
this assumption
Share Buy-Back Fully Franked Shareholder
Price Price Dividend Proceeds
Component
54 Value Release from
Unification at BHPValue of Unification
FTI’s Capital Allocation Assumptions for the Value of Unification
Assumptions by Category DLC Unification
Dividends Dividend payout ratio of 65% Dividend payout ratio of 65%
Franking credit value of AU$0.45 Franking credit value of AU$0.40
on the dollar on the dollar within three years
A negative franking credit value of unification
of AU$(0.45) on the dollar has
been attributed to the DSM
Buy-Backs US$10.0 billion net cash US$10.0 billion net cash
proceeds from sale of shale proceeds from sale of shale
assets in 2018 assets in 2018
US$4.0 billion recurring amount US$4.0 billion recurring amount
every 4 years, beginning in 2018 every 4 years, beginning in 2018
60% of buy-backs are off-market 100% of buy-backs are off-
in Australia through Ltd market and in Australia
Shareholder Return from Off- 60% of buy-backs are off-market 100% of buy-backs are off-
market
Market Buy-Backs (Ltd) 1
1. The off-market buy-back assumes a 14% discount, which is the same discount used in prior BHP off-market buy-backs and
55 accepted by the ATO in prior ATO class rulings Value Release from
Unification at BHPValue of Unification
Value Available to Shareholders Based on Capital Allocation Assumptions
The table below represents the net present value of capital return benefits of unification based upon the utilisation of
franking credits through dividends and discounted off-market share buy-backs in the context of unified BHP’s expected
shareholder composition versus the existing DLC structure
Net Present Value (US$ millions) Unification Unification
Total - DLC = Net of DLC
Enhanced Capital Return Benefits:
a Dividend Franking Credit Value Release $ 9,716 $ 5,048 $ 4,668
Franking Credit Value from Off-Market Share Buy-Backs 6,174 3,774 2,400
Shareholder Return from Off-Market Share Buy-Backs 3,887 2,276 1,611
b Off-Market Buy-Back Franking Credit Value Release $ 10,061 $ 6,050 $ 4,011
Total Enhanced Capital Return Benefits $ 19,777 $ 11,098 $ 8,679
Returning capital through both dividends and off-market buy-backs are options already available to BHP but the DLC
structure has significantly restricted the optimal release of value from franking credits. The value of franking credits
is only realised on either their distribution or the expectation that franking credits will be distributed, which is
limited under DLC
If BHP were to implement 100% of the buy-backs in Ltd using the DLC structure:
1. It would result in further economic misalignment - by 2050 Ltd shares as a percentage of total BHP NOSH
would decline from 60.3% to 41.7%
2. The total enhanced capital return benefits of unification as compared to the existing DLC structure would be
US$6,747 million
56 Value Release from
Unification at BHPValue of Unification
Value Available to Shareholders Post-Unification
The table below represents the net present value of unification benefits on a gross and net (i.e. deducting what value
would otherwise be released under the existing DLC structure) basis, through:
Net Present Value (US$ millions) Unification Unification
Total - DLC = Net of DLC
1 Enhanced Unification Return $ 14,135 - $ 14,135
2 Enhanced Capital Return Benefits:
Dividend Franking Credit Release 9,716 6,749 2,967
DSM use of Franking Credits - (1,701) 1,701
a Dividend Franking Credit Value Release $ 9,716 $ 5,048 $ 4,668
Franking Credit Value from Off-Market Share Buy-Backs 6,174 3,774 2,400
Shareholder Return from Off-Market Share Buy-Backs 3,887 2,276 1,611
b Off-Market Buy-Back Franking Credit Value Release $ 10,061 $ 6,050 $ 4,011
Total Enhanced Capital Return Benefits $ 19,777 $ 11,098 $ 8,679
Total Value $ 33,912 $ 11,098 $ 22,814
Costs to Achieve (391) - (391)
Total Net Present Value $ 33,521 $ 11,098 $ 22,423
57 Value Release from
Unification at BHPValue of Unification
Net Present Value of Unification Benefits to Shareholders
Value of Unification (US$ millions)
At Time of
Unification
+ $4,011 $(391) $22,423
$2,400 FC
+ $4,6682 $1,611
Shareholder
+ $14,135 b Return
Value increase is
equal to 18% of
a BHP’s current market
capitalisation
$126,2081
Current Aggregate Enhanced Dividend Off-Market Costs to Value of
Market Capitalisation Unification Return Franking Credit Buy-Back Achieve Unification
(11.2% uplift) Value Release Value Release
1 2
1. BHP’s market capitalisation as of 19 January 2018 is US$126,208 million: (3,212 million Ltd shares x US$24.54 Ltd price =
$78,809 million) + (2,112 million Plc shares x US$22.44 Plc price = $47,399 million)
58 2. Value of franking credits from dividends decreases to US$3,071 million if FTI’s forecast of retail shareholder upweighting does Value Release from
not occur after unification Unification at BHPCosts of Unification
Value Release from
Unification at BHPCosts of Unification
Determining the Costs of Unification
Direct Costs Unexplained Costs
• Transaction advisory fees According to BHP’s public
• Stamp duties statements, management performs
a regular review of the DLC
structure, but have provided
limited details to the market:
• Estimated total costs of US$1.3
billion (based on preliminary internal
analysis) excluding transaction
advisory fees without detailed
explanation of content
• Annual cost synergies of only US$2.4
million but ignores key unification
benefits
60 Value Release from
Unification at BHPCosts of Unification
Direct Costs
• Two costs directly associated with unification will be:
1. Transaction Advisory Fees – legal, accounting and advisory services
2. Stamp Duties – a tax on certain stock/asset value transferred
• Total costs for unification are expected to be around US$391.1 million1
1. Transaction Advisory Fees
Transaction Advisory Fees are Estimated to Total Around US$104.6 million
• Transaction fees for the Royal Dutch Shell unification (market capitalisation of US$212.8 billion2)
were estimated at US$115 million. For the Brambles unification (market capitalisation of US$15.5
billion2), transaction fees were estimated at US$45 million
• Taking into account BHP’s market capitalisation of US$126.2 billion,3 the Brambles and Royal
Dutch Shell unifications, and adjusting for inflation, we estimate that the transaction advisory
fees for BHP’s unification transaction to be US$104.6 million
1. There may be certain indirect costs of unification that are specific to certain classes of shareholders
2. As of unification date. 20 July 2005 used for Royal Dutch Shell. 24 November 2006 used for Brambles
61 3. As of 19 January 2018
Value Release from
Unification at BHPCosts of Unification
Direct Costs
2. Stamp Duties
Stamp Duties are Estimated to Total Around US$286.5 Million1
• The UK stamp duty upon unification is estimated at US$236.8 million
• The UK stamp duty is 0.5% of the value of the consideration given for the transfer (i.e., the market capitalisation
of the new shares issued to the transferring shareholders)
• The Australian stamp duty upon unification is estimated at US$49.7 million2
• Queensland and Western Australia assets are expected to receive exemptions for the duty under corporate
restructuring provisions
Jurisdiction Stock/Assets Rate US$ millions
Australian Duty
Queensland 0.58% $ 0.0
New South Wales NSW Energy Coal3 0.55% 20.1
South Australia Olympic Dam4 0.55% 10.9
Victoria Offshore Assets5 0.55% 18.7
Western Australia 5.15% 0.0
United Kingdom Mkt Cap of Transferred Stock6 0.50% 236.8
Total $286.5
Additional Exemption Relief Details and Assumptions:
1. Stamp duties are not applicable to assets held in South Africa or the US under the unification of Plc and Ltd entities
2. FTI is not aware that BHP has any assets in the Australian Capital Territory and Tasmania
3. Exemption relief is available should the unification transaction qualify as corporate reconstruction or consolidation in NSW
4. The transfer of a landholder interest for BHP in relation to its South Australian mining tenements should not be subject to duty on or after 1 July 2018. Corporate reconstruction relief
provisions are also available in South Australia until and after that date
5. Victoria assets (Minerva) are assumed to be 1/3 of the value of the Minerva, Macedon, and Pyrenees asset grouping. Bass Strait and Minerva represent offshore and onshore assets
Although ‘interest in land’ has a limited meaning that does not include mineral or petroleum interests, transactions involving mineral or petroleum interests are not dutiable property.
However, as the Victoria assets are a mixture of offshore and onshore, FTI has applied a stamp duty rate of 0.55% to 50% of the asset value to estimate a potential stamp duty. Note that
Victoria offers corporate reconstruction relief provisions
62 6. Exemption relief from this cost could be considered by BHP for company reconstructions and acquisitions under the Finance Act of
Value Release from
Unification at BHP
1986 Section 75 (Section 77 relief involves more stringent conditions and enforcement)You can also read
