November 1, 2018 / 6:37 AM / 14 days ago

Breakingviews - BHP atones for past M&A sins

An official stands in front of a sign for mining company BHP Billiton outside the Perth Convention Centre, where their annual general meeting was being held in Perth, Western Australia, November 19, 2015. REUTERS/David Gray/File Photo

SINGAPORE (Reuters Breakingviews) - BHP is atoning for past M&A sins. The world’s largest miner will hand back all $10.4 billion from its U.S. shale sale in a dividend and giant buyback. A nudge from pushy investor Elliott Management and greater deal discipline have led to a better use of capital than in the last commodities cycle.

    The mining industry has not, historically, been especially generous. Extra cash typically gets ploughed into pits and acquisitions. That has changed after the disastrous takeovers of the boom that ended around 2013, including BHP’s American oil adventures. Battered by writedowns, shareholders demanded their money back.

    The $120 billion Anglo-Australian company has cranked up payouts, but held back on share repurchases. Partly as a result, it has lagged rival Rio Tinto on a total shareholder return basis. Hedge fund Elliott, for one, wanted buybacks to increase. It also urged BHP to tackle its pile of tax offsets known as franking credits that built up under rules aimed at preventing the government from collecting twice on dividends.

    Thursday’s announcement helps to fix both. It was, for one, as swift as boss Andrew Mackenzie had promised: hours after receiving the oil money from buyer BP, the miner confirmed it would hand it back. Then, because the shale assets were held in the Australian business, it can efficiently target those investors and take advantage of the franking matter, too. Under unique rules Down Under, the company also can buy shares at a discount of up to 14 percent.

    Splitting the proceeds with a dividend curbs BHP’s market risk. As it stands, the plan affects about 8 percent of the Australian shares.

    There may yet be more payouts to come. Indeed, BHP’s nearly $11 billion of net debt is toward the bottom of its target range. And it generated an impressive $1 billion-plus of free cash flow a month in the year to June.

    Small deals should continue, such as the purchase of stakes in $900 million SolGold, the owner of Cascabel, a promising copper project in Ecuador. Bigger targets look pricey, though and are best avoided. Mackenzie now has his own higher bar for financial balance to clear.

Breakingviews

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