Sydney view: Virtual merger gives rise to real concerns

By GILES PARKINSON

In just over a week shareholders gather to vote on Australia's biggest corporate deal - the $A58 billion ($71 billion) virtual merger of BHP and Billiton - and its proponents have reason to be feeling nervous.

BHP shareholders meet next Friday to vote on creating a dual-listed company (DLC) structure with Billiton. It is likely BHP will gather the 75 per cent support it needs, but it is by no means certain.

Institutional shareholders are still expressing concern about the lack of financial details supporting the case to merge.

They have also expressed concern over the size of premium being paid by BHP shareholders for Billiton's assets, near term growth prospects for BHP shares and the huge payments being made to Billiton's management as reward for bringing the deal to the table.

It is an unusual deal. No cash, no shares and no assets will change hands.

The two companies will remain separate entities and will be listed on their own stock exchanges. There is really no merger at all, except of the board of directors and management that will run the assets belonging to the two companies, and of the profit and loss account.

The two companies say the DLC will have a market value of $A57 billion, and have agreed that BHP shareholders should own 58 per cent and Billiton shareholders 42 per cent.

Some analyses suggest that equates to a premium of 20 per cent for Billiton, and argue that the ratio should be closer to 70:30 to better reflect the respective values of the companies.

BHP concedes there is a premium, but says it is much lower than that suggested by the market. But it won't release an independent expert's report or a detailed financial analysis to support its claim. Hence the deep sense of suspicion over the deal.

(The other DLC being proposed at the moment - between Brambles and GKN - has been much better received because it is a "nil premium" merger, helped by the fact that the companies are effectively merging assets that have been sitting in a joint venture between the two groups for the past 20 years).

It is the lack of disclosure and the need to reconcile the various regulatory regimes that has begun to trouble market authorities.

Last week, in his first public speech as head of the Australia Securities and Investments Commission, David Knott questioned the status of the deals and talked of the need to ensure that shareholders were given adequate information.

On Friday, he issued a statement saying that BHP had agreed to provide further details of the proposed merger, and said regulators needed to give a careful assessment of the nature of such deals.

That is the irony of the situation. The DLC structure is born out of the desire and the need to avoid a range of tax, accounting and legal issues over a score or more jurisdictions.

That is its beauty, say the investment bankers and the lawyers who have negotiated their way through a maze of financial and legal hurdles.

Other companies will be watching the events in coming weeks with great interest. Investment bankers say up to six similar structures are in the pipeline.

It is, in their minds, the perfect manoeuvre for an Australian company that cannot afford an overseas transaction and would not be permitted to be sold to an overseas bidder. It gives the Australian company better access to international capital markets and growth opportunities, and its long-term strategy cannot be faulted.

That notwithstanding, some analysts are calling for the merger to be rejected. "I like the deal, I hate the terms," is the common refrain.

* Giles Parkinson is editor of AFR.com