Very nice idea from BHP Billiton today, which is promising a $30bn buy-back if its takeover of Rio Tinto goes through.
This seems to have four main benefits:
1. It amounts to sweetening the offer with deferred cash, the promise of which helps BHP shares rise rather than fall, as they probably would if BHP simply sweetened its offer with cash. Or at least, that was the case this morning, since when all the miners are off a bit.
2. It will allow the enlarged BHP to gear up and make its rather under-geared balance sheet more efficient.
3. It gives shareholders greater choice of how great a holding they want to retain after the deal than if they were forced to cash out.
4. By targeting the buy-back more heavily towards the UK-listed shares, the enlarged group will be able to ensure that more than 50 per cent of the stock is listed in Australia (I think Rio’s constitution dictates you cannot make an offer for one of its companies without making an equivalent offer for the other, but share buy-backs are a different matter). This is good for tax and political reasons. Might it also help compensate for the discount at which London-listed BHP shares trade at to the BHP shares listed on the Australian stock exchange, which has irked some hedge funds?
Spread across BHP and Rio’s shares, the buy-back would be worth about 150p a share. Its reception, however, has been good but not wildly enthusiastic.
BHP shares today are off 22p, or 1.3 per cent, at £16.06, valuing the three-for-one share offer at £48.18 a share, which is less than the £48.24 it was worth on Friday night. Investors clearly expect more: Rio, which was up 176p, or 3 per cent, earlier, is still up 14p at £56.38.
BHP has been presenting details of its proposed deal and it’s been keen to placate worried Chinese customers by pointing out just how much extra iron ore the deal will allow it to extract and how much more it will be able to supply China with. Quick aside: don’t underestimate the competition concerns here. The Western Australian reports that some there are calling for the state government to intervene because of the impact merging Rio and BHP’s interests at the Pilbara.
Enough of all that. Here is some really bad news. Teun Draaisma, the head of European equity strategy at Morgan Stanley, has turned seller. This is the man who said “sell” in June, just before the market tanked. Then he said “buy” in mid-August, and the market rose. Today, he cut his overweight recommendation to neutral.
We’ll also have a good look at what Luqman Arnold is up to with Northern Rock, where he has sought advice from his old UBS colleague, Ken Costa, now at Lazard. Arnold and his colleagues would parachute in and run the business in return for a undisclosed equity stake. He is an impressive guy but he has come convincing to do.
Elsewhere, the FSA is proposing a tightening of disclosure rules by holders of contracts for difference. Its consultation document proposes various options. The cheaper one would be to require a disclosure of any CFDs relating to 3 per cent or more of a company’s total voting rights, unless the holder of the CFD could not exercise voting rights and had not made any arrangement to sell the underlying shares. The FSA said it expected the majority of CFDs to fall within this “safe harbour” provision.
Lastly, Standard Life shares are up almost 9 per cent after its defeat in the battle for Resolution – a mixture of relief and takeover speculation. The company now has some hard work to do rebuilding the credibility of its organic growth strategy.