BHP BILLITON GROUP (AUS) BHP
November 10, 2009 - 4:50pm EST by
thoreau941
2009 2010
Price: 38.49 EPS $1.15 $1.95
Shares Out. (in M): 3,358 P/E 32.0x 19.0x
Market Cap (in $M): 199,532 P/FCF 66.0x 39.0x
Net Debt (in $M): 5,941 EBIT 15,900 20,500
TEV ($): 216,692 TEV/EBIT 14.0x 11.0x

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Description

 

BHP Billiton Arb

BHP Billiton Ltd. (tickers BHP US, BHP AU, BHP LN) and BHP Billiton PLC (tickers BBL US, BLT LN, BIL SJ) trade at roughly a 20% spread. Currently, in US trading, BBL US is at $59.62 while BHP US is at $71.48.

BHP Billiton has a dual listing structure consisting of shares of BHP Billiton Limited and BHP Billiton PLC.  The idea is to go long shares of BHP Billiton PLC and short an equal number of shares of BHP Billiton Ltd. to capture the 20% spread between the two, and close the trade if the spread narrows to 5-10%.

The two underlying companies are have the same economic and voting rights (Company 20-F):

Equalisation of economic and voting rights: BHP Billiton Limited shareholders and BHP Billiton Plc shareholders have economic and voting interests in the combined BHP Billiton Group. The economic and voting interests represented by a share in one company relative to the economic and voting interests of a share in the other company is determined by reference to a ratio known as the 'Equalisation Ratio'. Presently, the economic and voting interests attached to each BHP Billiton Limited share and each BHP Billiton Plc share are the same, since the Equalisation Ratio is 1:1. The Equalisation Ratio would change if either BHP Billiton Limited or BHP Billiton Plc returned value to only its shareholders and no matching action were taken."

Historically the spread between the two securities has averaged 9.4%. The spread has tended to bottom around 0% and peak in the low 20s%. There have been days when the spread spiked to greater than 25%, but these have been short-lived anomalies usually lasting a day or two. 

 

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    Description

     

    BHP Billiton Arb

    BHP Billiton Ltd. (tickers BHP US, BHP AU, BHP LN) and BHP Billiton PLC (tickers BBL US, BLT LN, BIL SJ) trade at roughly a 20% spread. Currently, in US trading, BBL US is at $59.62 while BHP US is at $71.48.

    BHP Billiton has a dual listing structure consisting of shares of BHP Billiton Limited and BHP Billiton PLC.  The idea is to go long shares of BHP Billiton PLC and short an equal number of shares of BHP Billiton Ltd. to capture the 20% spread between the two, and close the trade if the spread narrows to 5-10%.

    The two underlying companies are have the same economic and voting rights (Company 20-F):

    Equalisation of economic and voting rights: BHP Billiton Limited shareholders and BHP Billiton Plc shareholders have economic and voting interests in the combined BHP Billiton Group. The economic and voting interests represented by a share in one company relative to the economic and voting interests of a share in the other company is determined by reference to a ratio known as the 'Equalisation Ratio'. Presently, the economic and voting interests attached to each BHP Billiton Limited share and each BHP Billiton Plc share are the same, since the Equalisation Ratio is 1:1. The Equalisation Ratio would change if either BHP Billiton Limited or BHP Billiton Plc returned value to only its shareholders and no matching action were taken."

    Historically the spread between the two securities has averaged 9.4%. The spread has tended to bottom around 0% and peak in the low 20s%. There have been days when the spread spiked to greater than 25%, but these have been short-lived anomalies usually lasting a day or two. 

     

    Catalyst

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    Messages


    Subject99/00 Spread
    Entry11/12/2009 03:27 PM
    Memberthoreau941

    Regarding the spread in 99/00 - The spread at that time was not meaningful in the context of this specific trade as BHP Billiton was formed in June 2001

     


    SubjectCurrency
    Entry11/12/2009 03:28 PM
    Memberthoreau941

    With regards to currency, one can hedge with forwards as the cost is fairly low given the current interest rate exposure.  There are also ADRs for both should you prefer. 

     


    SubjectRE: Why?
    Entry11/12/2009 03:29 PM
    Memberthoreau941

    I do not know of any event that will trigger a close of the spread, however at the end of the day both the long and the short represent a claim on the same economic asset so there is limited long term risk. We are at the wide end of the historical spread now. Although there is no catalyst that will force a close, I think it is a reasonable bet to put this position on at the high end of the historical spread range and take it off at the low end, given that it doesn't cost anything in borrow to wait. I think you can do this trade repeatedly over time with little principle risk as the spread opens and closes.


    SubjectRE: RE: Currency
    Entry11/13/2009 02:09 PM
    Memberjacob828

    Couple observations as I've looked at this trade and thought I could add a couple data points.  First, it looks like the company somewhat 'gets it' i.e., in the past, if you look at buyback activity laid out in the 20-F, the company has bought back chunks of stock and is not bound to do so equally in the London and Sydney markets i.e., it has and can buyback stock that is trading at a cheaper level.  Second, fwiw, IR in London, Sydney and US all claim that any capital raise will be focused / done in the most expensive market at the time i.e., Sydney, and future buybacks will be focused on the cheaper market.  It is widely known that BHP is looking to do a major deal in the next twelve months (after its failure with Rio) and so an equity raise does not seem like a remote outcome.

    Also, I am not sure if there truly is material currency risk/exposure if one is shorting the ADRs (which converts everything back into the same functional currency) and this is a US$-based / commodities business (which also reports in US$).  If the pound declined 50%, there would be no change in the US$ value of the business and the UK shares theoretically would increase in price (and BBL wouldn't change).


    Subjectquestion
    Entry11/17/2009 11:09 AM
    Memberhawkeye901

    It appears to me that the spread has generally widened over time as the australian dollar has appreciated vs. the pound.  If you graph the AUD vs. the GBP over time, the correlation with the spread in this trade is quite high.  The same thing is actually occurring with Rio Tinto. 

    Do you have any idea why this is?  The currency shouldn't really matter - you own shares in the same company and the relative exchange rates of the local mkt where the stocks trade has nothing to do with their underlying dollarized value.  Any thoughts would be helpful. Thanks

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