IF MARIUS Kloppers is fair dinkum about bringing value to BHP shareholders, he ought to shelve his big acquisition strategy and bust the thing up.
On the whole, acquisitions destroy value, demergers create it. Look no further than Boral-Origin, CSR-Rinker, MIG’s toll road spin-offs or BHP’s own BlueScope and OneSteel demerger deals. Sadly for shareholders, though, it is not in the executive psyche to get smaller.
After toasting at least $800 million in banker, lawyer and consultant fees on three aborted deals worth $100 billion, you can bet Kloppers and his board would have at least canvassed the idea.
The rising tide of global protectionism and BHP’s own leviathan size have now seen off a $70 billion takeover for Rio, a $25 billion iron ore joint venture in the Pilbara and, most recently, the $40 billion bid for Potash Corp. The third, paradoxically, was put to rest by a conservative Canadian prime minister after BHP had cried foul about sovereign risk in Australia.
The world has sent BHP a message: you are too big. The market has sent BHP a message: we want a buy-back, a return of capital; that’s why your shares rise when your deals fall through.
Yet at this week’s annual general meeting BHP sent the world a message: we are still in the market for humungous acquisitions. Sure, there are the big goldies such as Newmont. There is Woodside to consider. Freeport-McMoRan, perhaps. For BHP, an acquisition would have to be big to make a difference and big makes it more risky.
It might be counter-intuitive for Kloppers and his alpha-male board but that lazy $11 billion in cash on their balance sheet would be far better deployed in, say, a three-way demerger of base metals, petroleum and iron ore operations. Now is the moment for Kloppers to deliver the goods.
On April 10, 2008, there was high indignation – no, let’s make that fury – when this newspaper published a piece from yours truly comparing St George with Northern Rock.
The building-society-turned-bank had just gone bust, been nationalised, that is, by the British Government. Our hypothesis was that St George was like the Northern Rock, its aggressive mortgage growth funded largely by wholesale markets. In short, a similar fate awaited St George.
It was an unwelcome suggestion at the time.
The sharemarket had shed 1000 points since January, financial engineers and leveraged share traders were hitting the wall. And the Happy Dragon was, understandably, not ecstatic.
Under pressure from St George, the newspaper ran a lengthy response that failed to address the facts and more or less shot the messenger. As there had been a run on Northern Rock and fear had well and truly gripped financial markets, yours truly was happy to let it ride.
St George was on the same trajectory as the Rock. The competition tsar Graeme Samuel knew this when he let Westpac’s takeover of St George slide. Commonwealth’s purchase of BankWest likewise.
Yes, it was bad for competition and, yes, under normal circumstances he would never have passed it. But these were not normal circumstances.
The Dragon’s predicament illuminates the wholesale funding issue exquisitely (you know, those incessant wounded cries from the big banks about their cost of funds).
Even in April 2008, nine months after the credit market meltdown and just as the GFC was engulfing equities markets, St George was still flogging 100 per cent, zero deposit loans.
Under the stewardship of Gail Kelly, the ever dynamic Dragon had bulked up its retail lending book from $35 billion to $75 billion in just six years. It was a stunning performance and, in retrospect, dangerous. But unlike its big bank rivals – and in common with Northern Rock – the Dragon’s asset growth was mostly funded by borrowing on offshore credit markets, rather than by deposits. The rub with this wholesale funding is that the price changes. You have to roll it over every three to five years.
And the Northern Rock had bitten the dust after only a few months of losses. It didn’t need to make a loss to fail. The credit meltdown simply pushed its cost of wholesale funding too high. The Rock could no longer fund its mortgages.
True, St George’s margins were higher than Northern Rock, its leverage was lower and wholesale funding comprised half its loan book, not 75 per cent as at Northern Rock. Nonetheless, the two were similar in many aspects.
With St George at the peak of its powers in late 2007, shortly after the credit crisis and shortly before the sharemarket touched its all-time zenith in November, Kelly left the bank for the top job at Westpac.
There she inherited the cleanest balance sheet in Australian banking, thanks to her predecessor David Morgan.
Once again, a stunning performance. Then, the piece de resistance.
On May 12 – with the cost of wholesale funding on global markets at increasingly punishing levels and St George’s asset growth apparently outstripping its earnings growth – Westpac announced its takeover of St George.
It is a deal excellently timed and now vindicated by time – and one which was struck when Kelly still had a her shares in St George.
There was an element of luck and an element of cheek but she has put the boys in the shade.