BHP Attracts Yet Another Activist Investor

Many people are familiar with value investing. Value investing is when you buy stocks for less than what they’re worth. But I’ll bet only a minority of investors practice this widely-known investing style.

Investors who buy companies with low price-to-earnings ratios or some other value metric aren’t value investors in my book. Anyone can do that.

A value investor is someone who dives deep in order to understand a business. They know about the industry, and how the competition is performing. Most importantly, they think about the future. What will the business be worth five-to-10 years from now? If more money is invested into this company, do they have a business model which could compound your investment?

These aren’t easy questions to answer. Many analysts and fund managers get paid millions just to come up with answers to these questions.

But an investing style even more niche than value investing is ‘activism’. Activist investors build up equity stakes in cheap businesses and then put pressure on management to unlock shareholder value.

Unlike Warren Buffett, who buys businesses with value, activists buy businesses with poor management and eroding returns.

Recently, BHP Billiton Ltd [ASX:BHP] gained attention from activist hedge fund Elliott Associates. Last month, they pressured BHP’s management to spin off its US energy assets. Elliott’s move on the big miner has encouraged other activists to do the same.

As reported by the Australian Financial Review, Sydney-based hedge fund Tribeca Global Natural Resource is the latest activist to pressure BHP for change:

Tribeca Global Natural Resources has called for an overhaul of the BHP Billiton board, which it claims has wasted $US30 billion ($40 billion) of capital, a figure that could have been $US50 billion ($67 billion) higher if not for deals it failed to get done.

Tribeca outlined its concerns in an eight-page letter titled “Making BHP Great Again” that was sent to its investors late on Thursday.

Tribeca’s four-point plan to achieve substantial shareholder gains is as follows:

  • BHP should divest their US onshore assets which could release $10 billion;
  • Return capital to shareholders and invest in growth projects;
  • Leave the dual-listing structure intact; and
  • Renewal of the board.

Tribeca said the retirement of chairman Jac Nasser was ‘a critical opportunity to reset the culture to one that covets capital efficiency and EPS growth and we hold high hopes that this opportunity will not be wasted.

However, I wouldn’t expect BHP to start gutting management and executives tomorrow. Tribeca will have to encourage other shareholders to vote for a change.

What now for BHP?

There are many critics of activist investing. While they try to increase shareholder value, some argue activists are doing more harm than good. But I believe activists are an essential part of our market. We need them.

When a company’s board or management steps out of line, guess who comes in to straighten them out?

This way, management is kept accountable, and the board is told to do a better job. But even if companies are able to shrug off activists, they’re still forced to think about shareholder value and how it could be improved for the future.


Härje Ronngard,

Junior Analyst, Money Morning

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