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

The pathway to a dissolution of the structure had been cleared for the announcement of the unification of Ltd and Plc that came in August last year.

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.

From the moment the dual-listed structure was established shares in the two arms have traded differently.

For most of the two decades since the formation of the dual-listed structure (although not always) the Plc shares have traded at a material discount to Ltd’s, generally in the mid-teens although it has been as much as 20 per cent.

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.

There are probably other, albeit less significant, influences.

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 the UK. The size of BHP within the ASX relative to Plc’s lesser importance in the UK market – despite being one of the larger companies in that market — would add to the liquidity.

Different economic environments, interest rates and currencies may also have played roles.
In any event, there are fund managers who see the one-for-one terms of the unification – dictated by the legal reality that a Plc share has exactly the same rights and entitlements to earnings and dividends as a Ltd share – providing a windfall to Plc shareholders as the historic discount is wiped out by unification.

That has largely happened. From the moment unification was announced Ltd shares have fallen and Plc shares risen.

What was a Plc discount of 21 per cent immediately ahead of the unification announcement has been closed to less than three 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.

Ltd shares have fallen about 10 per cent and Plc shares have risen about six per cent since the corporate restructure was announced.

The greatly increased capitalisation of BHP within the Australian sharemarket, however, will increase the concentration of the market around the big banks and the big resource companies and inevitably increase its volatility significantly, impacting the value of the rest of the market.

That arbitrage opportunity was obvious. What happens next to BHP shares, post-unification, isn’t quite as predictable.

There will be flow-back.

With Plc shares…