What BHP’s big move home means for the Australian sharemarket

BHP’s 20-year experiment with a sophisticated but unwieldy corporate structure will end this week. Its demise has implications, not just for BHP and its shareholders here and in Britain, but the wider Australian sharemarket.to dissolve the dual-listed entity structure constructed in 2001 for the Big Australian’s merger with Billiton.

Despite some early complaints that the terms of the merger were too generous to Billiton shareholders the structure worked as designed until 2015, when BHP spun out most of the Billiton assets housed within the British entityThat left the Plc entity without any substantial asset base or cash flows, forcing the Ltd arm of the structure to pour increasing amounts of cash into the British structure to enable it to pay dividends and “wasting” significant amounts of franking credits in the process.

When BHP shareholders meet on Thursday it is almost a foregone conclusion that they will approve unification. The qualification is that there have been Australian fund managers urging a vote against the proposal because they believe, with some validity, that it results in a transfer of value from Ltd shareholders to Plc’s.

The obvious explanation for the discrepancy is Australia’s dividend imputation system – a BHP dividend is more valuable in after-tax terms to an Australian shareholder than the same nominal dividend is to a Plc shareholder.The larger scale of BHP relative to Billiton – the 60:40 appointment of value in the original merger – has meant the liquidity in the Australian market for BHP shares has been significantly greater than that in Britain.

What was a Plc discount of 21 per cent immediately ahead of the unification announcement has been closed to less than 3 per cent as arbitrageurs sold BHP shares short and bought Plc shares that they will use to cover their positions, at tidy profits, once the unification is complete. Against that, BHP’s weighting in the ASX will increase materially, from about 6.2 per cent to about 10 per cent. Australian index investors and those funds benchmarked against the ASX indices will be buyers.

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