On Thursday, shareholders in diversified mining giant BHP (ASX: BHP) voted on a proposal put forward by the company to unify its dual-listing corporate structure.
At the moment, BHP is listed on both the Australian Securities Exchange, as well as the London Stock Exchange, where it is part of the FTSE 100 index. The dual-listing dates back to the merger between BHP and Billiton, which took place in 2001, and resulted in a dual structure with parent companies in both Australia and the UK.
Following the local shareholder vote, where over 96% of proxy votes backed the unification proposal, and the support of more than 97% of investors at the company’s London shareholder meeting, BHP will fold its dual-listed structure into one main listing on the ASX. The proposal required approval from 75% of both sets of shareholders.
What are the reasons behind BHP unifying its structure?
Upon announcing plans to unify BHP’s structure, management cited a number of drivers behind the decision. Among these, the Board pointed to the prospect that a simpler and more ‘agile’ company would be afforded the “best position to capture the opportunities presented as our world evolves”. In effect, this means more flexibility and efficiency when making decisions around deals.
On top of that, the company’s existing structure has been deemed somewhat outdated. When BHP and Billiton first merged back in 2001, around 40% of the Group’s earnings were derived through the UK company. Due to decisions around commodity exposure since, that has now dropped to around 5%, with management suggesting the corporate structure should be “fit for purpose”.
Unification will also help reduce the administrative burden associated with the duplication of existing functions, including AGMs, reports, separate boards in both Australia and the UK. There is also some argument that a unified entity may be more attractive to third-parties when offering shares as consideration in any corporate transactions, while franked dividends are set to be distributed to all shareholders and address one of the current quirks of the two businesses.
Across the long-term, BHP management believe mandated buying of the ASX-listed stock could help underpin demand and share price trading.
What impact will unification have on the ASX?
Following unification, shares in the UK-listed company will be transferred to the ASX-listed version of BHP. This means that BHP’s total market capitalisation is set to increase quite markedly. At the moment, UK-listed BHP shares represent around 42% of the company’s total share register.
As a result, BHP will eclipse Commonwealth Bank (ASX: CBA) as the biggest ASX-listed stock by market cap. Naturally, there will be broader ramifications for the S&P/ASX 200 Index.
Of the changes, BHP’s weighting in the benchmark index is set to jump from around 6.2% to more than 10%. S&P Dow Jones Indices, which manages global benchmark indices, announced recently that it will unify all shares in BHP and reweight the ASX 200 index before trading commences on January 31, 2022.
The change could draw some volatility into the market as the reweighting of the index occurs. This is because funds with a mandate to track the index will be required to buy more BHP shares in order to ensure their portfolio aligns with the stock’s new weighting on the ASX.
In some cases, certain funds may have restrictions on the maximum weight that any given stock can represent when rebalanced, which means if BHP exceeds this figure they could end up carrying some risk by way of greater exposure to that company than outlined to investors.
With BHP increasing in size, that also means the weight of the materials sector as a representation of the ASX will also increase. Some estimates put this increase at roughly 3-4%, but it also means that movements in the iron ore space are likely to hold even greater sway over the local market. The larger weight of the materials sector also means there will be a decrease elsewhere, and it appears the financial sector could ease by about 1%.
How will unification take place?
While the move still requires the last of the legal formalities to take place, including court sanction, unification of BHP’s Australian and UK-listed shares is expected to take place by January 31, 2022.
Although the ASX-listed shares have traditionally traded at a premium to the UK company, which is attributable to the benefit of franking credits for Australian investors, shares will be exchanged on a one-for-one basis. This means for every BHP share listed in London, it will be converted into one ASX-listed share.
Following unification, BHP will still retain a standard listing in London, with shares also tradeable via the Johannesburg and New York stock exchanges in a similar way Australians are now able to trade locally-listed shares in Block. As the London listing will no longer be a primary listing, BHP will drop out of the FTSE 100, and UK index-tracking funds will no longer be compelled to hold the stock.
The plan has drawn the attention of significant short-selling interest, with BHP now the fifth-most shorted stock on the ASX at more than 9.5% of the register. With the two versions of the stock set to unify, short sellers have been betting the premium between the two stocks would diminish, either through a decline in the share price of ASX-listed BHP shares, or a rally in the London stock.
For now, however, the only certainty is that big changes are coming for the ASX.
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