M&A

Every 5.5 BHP shares gets you one Woodside, but don’t forget the absolute gift horse: Fully franked credits

Wed 04 May 22, 10:29am (AEST)
Gift horse

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Key Points

  • Low-tax or zero-tax investors to earn additional income due to fully franked credits
  • Franking credits estimated to be around US$1.97 per BHP share
  • A possible side-effect of institutional investors waking up with a holding in Woodside shares could be some blind selling

Buy 1,000 shares in BHP (ASX: BHP) before 26 May and you’ll stand to receive around 181 shares in Woodside (ASX: WPL), which based on yesterday's share price ($31.70) would be worth $5,737.

Assuming shareholders agree to the all-stock merger between BHP and Woodside 19 May, Woodside shareholders will end up with a slice of BHP Petroleum’s oil and gas portfolio.

Under the mechanics of the deal, BHP will (on 1 June) make an in-specie distribution of 1 Woodside share for every 5.5 shares held in BHP. These shares are the proceeds of BHP spinning off its petroleum assets, hence owning 48% of the merged group.

Absolute gift

If you’re an SMSF or retiree who has struggled to get a decent return on record low term deposits in recent years, BHP’s 5.5 for 1 in specie distribution also offers an absolute gift of additional income generation.

That’s because BHP’s cleverly constructed in specie dividend – as opposed to paying cash - also allows low-tax or zero-tax investors to earn additional income due to fully franked credits.

Based on back-of-the-envelope guestimates, the dividend amount – a la Woodside shares – would according to one fund manager estimate (mid-April) represent around US$4.60 – or 12% of BHP’s share price – which would carry US$1.97 of franking credits per BHP share.

Blind selling

Gaurav Sodhi of Intelligent Investor suspects a possible side-effect of institutional investors waking up with a holding in Woodside shares - they neither want nor asked for - could lead to some blind selling.

This eventuality, adds Sodhi, could lead to some downward pressure of the Woodside share price.

What’s clearly weighing on the minds of institutional investors, adds Sodhi is a potential environmental, social, and governance (ESG) overhang weighing on Woodside’s capex decisions.

Taking good returns and investing in clean energy alternatives, like hydrogen – with uncertain financial outcomes - to keep institutional investors happy, notes Sodhi is something the market is currently struggling with.

“Given the price of oil (US$103.40) Woodside’s share price should be trading in the $40s, so it clearly looks as if capex and other issues are weighing heavily on the stock,” Sodhi notes.

Post-merger

BHP will have received 914.8m newly issued Woodside Shares at completion.

Woodside will retain its primary listing on the ASX and is seeking a standard listing on the LSE and a sponsored Level III ADR program on the NYSE from completion of the merger.

A share sale facility will be in place for eligible small BHP shareholders – with less than 1000 shares - who elect to participate, and for shareholders who are ineligible to receive Woodside shares.

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Woodside share price: A 12-month snapshot.

Written By

Mark Story

Editor

Mark is an investigative financial journalist and editor who started his career working for Marathon Oil in London. He has a degree in politics/economics and a diploma in journalism. Mark has worked on 70-plus newspapers and financial publications across Australia, NZ, the US, and Asia including: The Australian Financial Review, Money Magazine, Australian Property Investor and Finance Asia. Mark is passionate about improving the financial literacy of all Australians through the highest quality content. Email Mark at [email protected].

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