Shareholders size up interests of new resources giant BHP Billiton

Friday 13th July 2001

By Peter V O'Brien

Formal completion of the merger of mining and mineral production companies, Australia's BHP and the UK's Billiton plc, on June 29 was the final step in creation of a massive international company known as BHP Billiton.

New Zealand-based shareholders in the merged group will probably take considerable interest in its development.

The news release announcing completion of the merger contained a fair amount of the hype that is typical on such occasions but it also had information about the company's size and range of interests.

BHP Billiton was described as the "world's leading diversified resources group."

It was said to have "an exceptional asset base of low-cost, long-life operations with outstanding commodity and country diversification."

Based on closing share prices for each constituent company on June 28, the new group had a market capitalisation called an "enterprise value" of about $US38 billion.

That figure comes into perspective when it is noted the total New Zealand sharemarket at the end of last week was capitalised at $52.72 billion, including the local portion of overseas-based companies listed here, or $US21.27 billion at last Friday's closing exchange rate.

The statement said BHP Billiton would occupy industry leader, or near-leader, positions in aluminum, metallurgical coal, seaborne steaming coal, copper, ferro-alloys, iron ore and titanium minerals.

There were also substantial worldwide interests in oil, gas, liquified natural gas, nickel, diamonds and silver.

Activities are conducted on all continents and many countries. Integrating and operating such a diverse organisation is clearly a big task.

A clue to that came in information regarding the company's administrative structure. It has 17 directors, comprising the non-executive directors of BHP and Billiton and three executive directors.

BHP Billiton established a seven-person executive committee to run the outfit on a day-to-day basis. That committee's membership will rise to eight after the appointment of a chief financial officer.

The merger and integration process will be expensive but solid financial benefits were expected to outweigh the costs.

BHP Billiton will take costs associated with the merger into its 2001 results because it was completed before the end of the financial year.

The estimated cost was about $US98 million after tax, to be split $US43 million for BHP and $US55 million for Billiton. Another $US37 million of costs associated with the vesting of two share options schemes would be recorded in the Billiton accounts.

An earlier letter to shareholders said directors of each company had identified expected merger synergy benefits through, among other things, efficiencies in procurement, shared business services, market services, ocean freight and the elimination of duplicated overheads.

They were currently expected to be about $US270 million before tax in the year ended June, 2003 with more benefits to be realised later.

The letter said the $US270 million, in the context of pro forma unaudited profit and loss information for the combined group was less than 2% of "related operating costs" (a term sometimes described as "miscellaneous" or "other operating costs").

A discounted cashflow analysis accompanying the shareholders' letter had assumptions about future commodity prices.

Among exchange-traded commodities, aluminum was expected to go from 70USc a pound to 75USc a pound in the year ended June 2002, copper from 89USc a pound to 93USc, nickel from $US3 a pound to $US2.99, lead down to 22USc a pound from 25USc, zinc from 62USc a pound to 50USc a pound, silver up from $US4.50 an ounce to $US4.98 and oil (west Texas intermediate) from $US18.50 a barrel to $US22.10.

Projections were also given for iron ore (lump), iron ore (fines), Queensland coal, South African export coal, high carbon ferro manganese, ferro chrome and titanium oxide.

With the exception of Queensland coal (down) and ferro chrome (no change) prices were expected to rise for that group of commodities, which are non-exchange traded.

Apart from the usual matters associated with a merger, which were to be tackled immediately, the company's news release set out "further areas of focus" in coming months.

While expressed in general terms, they indicated the issues that arise in such cases and were:

Proceeding with the integration programme, including the finalisation of additional management appointments;

Establishing detailed business plans and strategies at the corporate and customer sector levels;

Evaluating and sequencing the group's quality growth opportunities; and

Optimising the financial and balance sheet arrangements for the group.

The "customer sector groups" referred to covers aluminum (aluminum, alumina), base metals (copper, silver, lead, zinc), carbon steel materials (coking coal, iron ore, manganese), stainless steel materials (chrome, nickel), thermal (steaming) coal, petroleum (oil, gas, liquified natural gas) and steel.

The likelihood of the total complex merger exercise working out seems good, particularly as the BHP part of the group has considerable recent experience of restructuring and streamlining diverse, worldwide operations.

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