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BHP counters activist point by point

Taking Stock

BHP counters activist point by point

"Hug them to death". The words used last year by one fund manager to describe the best way of dealing with an activist shareholder. Domestic companies prefer to engage privately with activists, hear their concerns and demonstrate this engagement to other shareholders - the hope being that business can continue largely uninterrupted.

But what happens when those disagreements break cover? This month has witnessed a few high-profile spats, involving various arms of US-based hedge fund group Elliott Management. The most relevant to our audience is BHP Billiton(BLT), the Anglo-Australian miner.

Elliott's 'value unlock plan' has three major parts: simplifying the group structure into one company, headquartered and paying tax in Australia, in order to realise gains from dividend tax relief, known as 'franking credits'; spinning out the US petroleum business; and using cash to buy back shares. All in all, Elliott suggests $46bn (£36bn) of extra value is there to be unlocked for shareholders.

BHP's response has been considered and substantial. In an initial rebuttal, it revealed "many months" of behind-the-scenes discussions, but concluded that the costs and risks of the suggestions outweighed their benefits. A few days later the miner responded in greater depth, with chief Andrew Mackenzie saying the company had considered such proposals "in detail many times over the past years". A 29-slide presentation went through the proposal, and BHP's response, point by point.

The costs of unification dwarf the savings, BHP argued, adding that some franking credits would actually be wasted under the proposal. Bosses said the petroleum division would be weaker alone, unlike non-core spin-offSouth32 (S32), and insisted the market currently has the information it needs to value the segment. And, in terms of capital returns, BHP said buybacks are just one option for capital allocation, adding that "a mechanistic approach is inappropriate for a cyclical resources company".

The battle isn't over, as both sides press their points with shareholders. But it is fairly hard going for Elliott. Australia's Treasury department has said that any significant changes to the corporate structure would be subject to a national interest test put in place at the merger of BHP and Billiton in 2001.

These exchanges are positively polite compared to the month's other news. US-based engineer Arconic, which makes everything from aeroplane wing skins to spacecraft vents, has lost its chairman and chief executive, Klaus Kleinfeld, after he "showed poor judgment" - the company's words - sending a letter directly to a senior officer at Elliott Management, which is pushing for strategic and management changes.

Back in Europe, Akzo Nobel has a battle on its hands to avoid a takeover by PPG Industries, a deal supported by Elliott Advisors - the hedge fund's European arm. In a strange twist, the Dulux paint maker's investor relations director was mistakenly cc'd in an email chain among Elliott staff. One Elliott employee was asked to notify PPG that it had submitted a request to Akzo for an extraordinary general meeting. Akzo is kicking back hard against this sharing of what it called "potentially price sensitive information", and has referred the matter to the Netherlands' financial markets regulator. Elliott is unlikely to be deterred, saying that it is well aware of its regulatory obligations, and that a substantial proportion of Akzo's shareholders have requested an EGM.

BHP's non-confrontational approach looks the better route. Just because disagreements have become public does not mean they need to become hostile. In this case, speaking softly is preferable to the big stick.

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