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  Issue No 95 Official Organ of LaborNet 11 May 2001  

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Corporate

Trust Me, I’m a Multi-National!

By Tony Maher and Bill Shorten

BHP unions have united across the factions to urge "No" vote on the planned Billiton merger.

 
 

The unions representing thousands of BHP workers are asking shareholders to make a positive difference to the company's future by voting "No" to the Billiton merger at next week's Extraordinary General Meeting. Many BHP employees are shareholders themselves, either directly or through their superannuation funds. We respect the right of all shareholders to make their own decision according to individual circumstances. But there are far too many unanswered questions about the Billiton merger, raising serious concerns that it will serve the long-term interests of neither workers nor shareholders. The BHP Board's response to these legitimate concerns - which is essentially to "just trust us" - is simply not good enough. The people of Newcastle and the Hunter region know this only too well.

The united BHP unions know from recent experience that poor decisions are inevitably paid for by the workforce as much as by shareholders. The various mistakes made by the BHP Board of Directors in the last decade have cost its workforce dearly in terms of cost-cutting, retrenchments and work speed-ups in order to make up for losses sustained elsewhere.

BHP and Billiton have not made available any independent report on the proposed merger. Until 4 May the BHP Board had not disclosed even the most basic assumptions used in valuing the merger, such as expected commodity prices and exchange rates. In response to a query from the Australian Securities and Investments Commission, the Board finally released these basic assumptions. But it is still a long way short of full disclosure.

For most investors it is impossible to adequately evaluate the benefits of the merger in the absence of more detailed information. The Board of BHP has made mistakes in the past which have cost shareholders and workers dearly. It is not good practice to present the largest deal in the company's history to shareholders without the best possible disclosure.

The need for transparency is emphasised by widespread concerns that BHP's assets may have been undervalued the relative to those of Billiton in the merger proposal. Some financial commentators have noted that the net effect of BHP's chosen commodity and currency price assumptions is that BHP is probably worth A$10 to A$15 billion less than it would be under today's actual commodity prices. This would mean varying the merger terms to split the respective values of the companies from 58:42 to a more accurate 65:35.

Placing a value on assets held over the long term is a difficult task, and it is prudent to use conservative assumptions. This should apply to a qualitative assessment of the Billiton assets, many of which are in African and South American countries with a higher risk profile. Further, many of Billiton's assets have been recently acquired so it is by no means certain that the assets are high quality and well-managed. Some of Billiton's assets also include companies and sites that were shed by BHP in the last few years (eg GEMCO and TEMCO in Australia) while others have been sold by Rio Tinto in the last year (eg coal assets in strife-torn Colombia).

Negative shareholder reaction to the merger has also developed in Britain, particularly to the multi-million dollar share incentives being offered to executives in the event of the merger going ahead. Two of Billiton's major shareholder groups have attacked the plan, with the Association of British Insurers saying the company's action breached "prevailing best practice". And PIRC, the corporate governance consultancy which advises investors with more than £300 billion of assets, is urging shareholders to abstain on the merger vote as the best way of protesting the share scheme.

It is of great concern that Billiton shareholders are being asked to approve a massive bonus package for top Billiton management as part of the merger proposal that they must vote on. Billiton shareholders are not being given the opportunity to vote on the remuneration package separately in accordance with established principles of good corporate governance.

Even worse, the merger proposal states that there will be a "liquidated damages" fee of $US100 million should the shareholders of either company fail to endorse the proposal. No breakdown of these damages has been given. BHP shareholders are effectively being told: "you must vote for this or else the company will incur damages of $US100 million; a penalty your Board has voluntarily accepted as a term of the merger proposal". Shareholders are being denied full freedom of choice in deciding whether to support the plan.

Notwithstanding this "poison pill" shareholders should still vote "No" because of all the other unanswered questions surrounding the plan.

If the merger proposal is voted down, the BHP Board will retain the right and the opportunity to pursue further merger and acquisition proposals as it sees fit. These could include a revised proposal with respect to Billiton. BHP shareholders have nothing to lose by insisting on a more cautious approach.

Bill Shorten is the National Secretary-Elect of the Australian Workers Union (AWU).

Tony Maher is the General President of the Mining and Energy Division of the Construction, Forestry, Mining and Energy Union (CFMEU).

**************************

The Letter

Dear BHP shareholder,

BHP Ltd Extraordinary General Meeting 18 May 2001:

Vote NO to merger with Billiton plc

In our opinion the terms of the proposed merger between BHP Ltd and Billiton plc are not in the best interests of BHP shareholders or its workforce and therefore we are requesting that all BHP shareholders exercise their right to vote NO at the Extraordinary General Meeting on 18 May in Melbourne.

If you are voting by proxy, please complete and file your proxy form by 9.30am Wednesday 16 May.

Please read the following information before you exercise your vote.

Why are Unions involved?

The first and most obvious question for some shareholders is why Unions are taking a position on the merger proposal. The answer is simple. Firstly, BHP's workforce is a major stakeholder in the company. Tens of thousands of Australians and New Zealanders - mostly union members - have laboured in BHP over the decades. These workers built the company and are entitled to know that any merger decisions are soundly-based, in our interests and that of the nation as a whole. Good business decisions enhance our security of employment. Poor decisions are inevitably paid for by the workforce as much as by shareholders. In the last decade BHP workers have endured cost-cutting, retrenchments and work speed-ups to make up for losses sustained elsewhere.

Secondly, many union members employed by BHP are shareholders in the company directly or via their savings in superannuation schemes and other investment vehicles. We are concerned that the merger proposal represents poor value for these investments in both the short and longer term.

No independent report on the proposal has been released

"The absence of an independent report is a disgrace" - Tim Treadgold, Business Review Weekly, 4 May 2001, page 12

The Board of BHP Ltd has not made available to shareholders and the investing public any independent report on the merger proposal. Until 4 May the Board had not disclosed even the most basic assumptions used in valuing the merger, such as expected commodity prices and exchange rates. In response to a query from the Australian Securities and Investments Commission, the Board did finally release these basic assumptions. However, the information falls far short of an independent report.

It is certainly true that neither BHP nor Billiton are required by law to present an independent report on the merger. But their decision not to do so makes it impossible for all but the most astute investor to adequately evaluate the benefits of the merger in the absence of such information. The message from the Board to shareholders is "just trust us". We do not think that is good enough. The Board of BHP has made many mistakes in the past which have cost shareholders and workers dearly. This is the largest deal in the company's history and shareholders should have every opportunity to properly make an assessment before they are asked to vote. We say that this is simply not possible without the full and fair disclosure, especially when there are questions regarding the Board's accountability for the outcomes of the merger in the medium term (see below).

BHP assets have been undervalued relative to those of Billiton

"However, the net effect of BHP's chosen commodity and currency price assumptions is that BHP is probably worth A$10 to A$15 billion less than it would be if today's actual commodity prices had been used to set the merger terms.

The BHP Billiton merger terms split the respective values of the two companies 58:42. A more accurate reflection of the two companies' relative values would have been 65:35. BHP shareholders aren't as happens in some foreign takeovers selling the farm. They're giving it away" - Ivor Ries, The Australian Financial Review, 5 May 2001, page 14

Placing a value on assets held over the long term is a difficult task, and it is prudent to use conservative assumptions. On that basis it is arguable that the long run value of BHP assets should be based on worse commodity prices and exchange rates than it is currently receiving. However, such conservatism should also apply to a qualitative assessment of the Billiton assets. In view of the fact that significant assets of Billiton are in African and South American countries with a higher risk profile this does not appear to be reflected in their valuation. In addition to which, many of Billiton's assets are relatively recently acquired (eg the major Rio Algom purchase was completed only in the second half of 2000) which should make any estimation as to whether the assets are high quality at least uncertain. It is yet to be established whether those assets are well managed. Some of Billiton's assets include companies that BHP elected to get out of in the last few years (eg GEMCO and TEMCO in Australia) and others that have been sold by Rio Tinto in the last year (eg coal assets in strife-torn Colombia).

The merger proposal from the Board concedes that a premium is being paid for the merger with Billiton but a takeover of Billiton is not occurring, and in fact it is senior Billiton management who will be in charge of the merged entity in as little as two years. We do not consider any premium to be justifiable and therefore do not believe that BHP shareholders are not being given fair value for their stake in the merged entity.

The merger proposal is earnings dilutive for BHP shareholders in the short term

". . . a fund manager with Zurich Scudder Investments, Mr Nick Raffan, said it was difficult to justify BHP's assertion that the deal was earnings-positive in the first year. `Most people's models say it's not accretive until 2003.'" - Stewart Oldfield and Bill Pheasant, The Australian Financial Review, 5 May 2001, page 3

The problem discussed above of a low long term valuation for the BHP assets is further compounded by a poor prognosis for earnings in the short term. Billiton is a debt-laden company that does not have the strong cash flow of BHP. Therefore until (and if) synergies arise from the merger, the impact must dilute BHP's own earnings. This cannot be in shareholders' interests unless there are other benefits that outweigh the adverse impact on earnings.

BHP shares may trade at a discount to Billiton shares after the merger

"And the irony in all this is that BHP Billiton Ltd (the Australian company) will have the same weighting in the All Ordinaries index as is now held by BHP. Similarly BHP Billiton plc will have the same weighting on the UK's FT index. So the market capitalisations of the two listed companies that make up BHP Billiton will not be enhanced and therefore no more attractive to index investors." - Elizabeth Knight, The Sydney Morning Herald, 4 May, page 23

A major driver for the merger is that BHP Billiton will be "re-rated" by major institutional investors overseas, providing a major and permanent jump in the share price. But the fundamentals are that the majority of BHP's shares will continue to trade on the Australian Stock Exchange, whilst those of Billiton will trade on the London Stock Exchange - and therefore be much closer to the very large institutional investors that are sought by the BHP. It is unlikely that BHP Billiton Ltd shares will become part of any "Top 100" index in the UK or USA and so will not necessarily attract large overseas investors any more than they do now. On the other hand, investors in BHP Billiton plc, the British company, will be investing in a FTSE Top 100 company and will be gaining exposure to a large company with immense Australian assets in doing so. There is a very real possibility that the London-based shares of the merged company will trade at a premium to the Australian-based shares. It is difficult to see how the Australian-based shareholders can get the capital gains from a re-rating. Presumably the expected benefit to flow to shareholders from a merger would be the capital gain on share prices. In the absence of this we fail to see what benefit Australian shareholders will receive.

Bonuses for top management not able to be voted on separately

"Negative shareholder reaction to the merger also continued in Britain. Two of Billiton's major shareholder groups joined the attack on the move by the company to trigger its £48 million share incentive scheme following the merger. The Association of British Insurers said the company's action breached "prevailing best practice". And PIRC, the corporate governance consultancy which advises investors with more than £300 billion of assets, is urging shareholders to abstain on the merger vote as the best way of protesting the share scheme." Sandra O'Malley "BHP adds more details on Billiton deal but it may not be enough", Australian Associated Press, 4 May

"The most recent target for investors' anger is the £50 million reward being paid to Billiton executives after the company's merger with BHP, and Billiton's refusal to put the pay bonanza to a shareholder vote. Billiton has "bundled" into a single resolution the vote to approve the merger with BHP and the vote to approve changes to the executive incentive scheme, which will see Mr Gilbertson alone receive £6.5 million worth of shares and cash." Lenore Taylor and Stewart Oldfield, The Australian Financial Review, 7 May, page 1

"But shed no tears for Mr Anderson. He stands to pocket an extra $3.2 million "golden handshake" on his departure, topped off with $13.6 million worth of free shares, and options to buy another million shares at bargain prices." John Phaceas, The Australian, 19 April, page 23

It is of great concern that Billiton shareholders are being asked to approve a massive bonus package for top Billiton management as part of the merger proposal that they must vote on. Billiton shareholders are not being given the opportunity to vote on the remuneration package separately in accordance with established principles of good corporate governance. This particular concern can be shared by Billiton and BHP shareholders alike. Billiton shareholders stand to get a far better deal out of the merger than BHP shareholders but if they are tempted by the merger they have to accept the "pay bonanza" as part of the deal.

The issue must be of concern to BHP shareholders because the costs will be borne by the merged entity. Brian Gilbertson will become CEO of the merged company within 2 years --what prospect will there be of BHP Billiton shareholders in the future being given full and proper opportunity to approve or endorse the remuneration packages of directors and management?

Board accountability for medium term outcomes not adequate

"And those who can see no merit in the merger reckon it is little more than Anderson's early exit strategy - a claim that he is quick to deny." Elizabeth Knight, The Sydney Morning Herald, 4 May, page 23

The implicit proposal from the Board that shareholders simply trust the Board's judgement on this matter is flawed by the likely difficulty of the Board being held to account if the merged company fails to deliver as promised. It is a feature of the proposal that the current CEO, Mr Paul Anderson, will retire early and return to the USA in 2002 -- a substantially wealthier man than when he arrived.

Mr Brian Gilbertson, currently CEO and Chairman of Billiton plc will become CEO of the merged company on Mr Anderson's departure. Mr Mick Davis, currently Executive Director, Finance of Billiton will become Chief Development Officer and, being based officially in London, will be the day-to-day public face of the company to major overseas investors.

There is speculation that current Billiton directors are set to become Nos. 1 and 2 of the merged company within 2 years. While that may be good for Billiton shareholders, BHP shareholders are being told that the principal people they will have to hold to account for the outcomes of the merger, be they good or bad, are people they have not yet met. Moreover, they are people who will already be massively wealthy winners as a result of the special rewards for them that have been bundled into the merger proposal. Shareholders will not be fully able to "hold to account" the Board that is presenting the merger to them.

What about the "poison pill": the US$100 million damages fee?

The merger proposal states that there will be a `liquidated damages' fee of US$100 million should the shareholders of either company fail to endorse the proposal. No breakdown of such damages has been given. It is possible that the sum would be a disincentive to other companies that may have considered an alternative offer to BHP shareholders.

It is highly unsatisfactory that BHP shareholders have been presented with a proposal that says in effect: "you must vote for this or else the company will incur damages of US$100 million; a penalty your Board has voluntarily accepted as a term of the merger proposal". It is unsatisfactory because BHP shareholders are being denied full freedom of choice in deciding whether to support the merger based on the merits of the merger alone.

US$100 million damages is a high price to pay for voting against the merger. However, it is a tiny fraction of the market capitalisation of BHP Ltd. And it is also small compared to the substantial write-downs of poor performing assets that shareholders have had to endure in recent years. The issue to bear in mind is that the potential losses to BHP shareholders from an overly generous merger with Billiton are far higher.

What happens if the merger is voted down?

In the event that the merger fails the BHP Board will retain the right and the opportunity to pursue further merger and aquisition proposals as it sees fit. These could include a revised proposal with respect to Billiton plc. However, the message from shareholders should be:

· BHP must not be undervalued in any merger proposal

· There should be no premium paid by BHP in a merger unless that premium is paid for effective control of the target by BHP.

· Shareholders should have full information presented to them so they can make an informed decision on any merger proposal. "Just trust us" from the Board of Directors is not good enough.

· Top management and Directors' pay and bonuses should be subject to shareholder approval - not bundled with other proposals in a manner that undermines shareholders' rights in what is a critical area of corporate governance.

***

Please vote!

Your vote CAN make a difference. The merger proposal requires changes to BHP Ltd's constitution and this requires special resolutions with 75% of the votes cast to pass. Therefore the merger will not go ahead if there is significant opposition from shareholders ie. over 25%.

WE RECOMMEND YOU VOTE NO TO ALL12 RESOLUTIONS. Only Resolutions 2, 3 and 11 are special resolutions requiring a 75% majority, but all the remainder (eg appointment of Billiton directors to the BHP Board) are of no value if the merger itself is not approved. Therefore you should vote NO to all twelve.

This urgent request is sponsored by: the Association of Professional Engineers, Scientists and Managers, Australia, the Australian Manufacturing Workers Union, the Australian Workers Union, the Communications, Electrical and Plumbing Union, the Construction, Forestry, Mining & Energy Union, the Maritime Union of Australia and the New Zealand Engineering, Printing and Manufacturing Union.

Follow the BHP Campaign

http://www.cfmeu.asn.au/mining-energy/bhp


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*   Issue 95 contents

In this issue
Features
*  Interview: Geek Guys
Two of the union movement’s pioneers in new technology, Peter Ross and Mark McGrath, chew the fat about wired unionism and virtual politics.
*
*  Compo: Costa’s Angels
Behind the spotlight of the workers comp campaign four women trade union officials have been burning the midnight oil to protect injured workers.
*
*  Legal: View from the Bench
Compensation Court judge and former Attorney-General, Frank Walker, argues the Della Bosca workers comp reforms are a threat to judicial independence.
*
*  International: Timor: Time for the Truth
HT Lee was in Dili when the militas ran rampage. Now he wants the truth to come out.
*
*  History: True Believers
Frank Bongiorno looks at the origins of the Australian Labor Party, which celebrated its centenary of Caucus this week.
*
*  Corporate: Trust Me, I’m a Multi-National!
BHP unions have united across the factions to urge “No” vote on the planned Billiton merger.
*
*  Unions: AWAs – A Doomed Future?
ACTU Assistant Secretary Richard Marles plays clairvoyant and predicts a dismal future for AWAs.
*
*  Satire: Bush Defends One China Policy - Then Another China Policy, Then Another ....
President Bush today announced a major change to the United States’ policy of “strategic ambiguity” towards the status of Taiwan and its One China policy.
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*  Review: Surviving Survivor
Workers Online's Reality TV correspondent Mark Morey rakes over the coals of the Survivor II result.
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»  Three Stripes and You’re Out
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»  Unions and Students Move on Harvard
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»  IT Workers Alliance – Last Call for Comment
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»  Our News Feed Hits 1000
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»  Activist Notebook
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Columns
»  The Soapbox
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»  The Locker Room
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»  Trades Hall
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»  Tool Shed
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Letters to the editor
»  The Great May Day Debate
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»  Questions for Macca
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»  Qantas on Impulse
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»  Compo: The Great Tradition
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