BHP Arbitrage Opportunities

Interesting times ahead for BHP.

Two arbitrage opportunities coming into play:
a) The unbundling of its dual listing shares in Aus and UK
b) The hiving off of BHP Petroleum to Woodside in return for 48% ownership of the combined Woodside Entity.


(b) is more difficult to calculate and I think will take time to play out.

(a) Is the one that interests me more.

As of closing BHP PLC traded at 21.83 pounds. At an exchange rate of 0.52 this is equivalent to AUD$41.98 against a current BHP share price of $44.34 or a 9.5% discount.

Now we know about the franking differentials, but it will be interesting to see how both trade after BHP trades ex-dividend. Given that the transfer of UK shares to AUS shares occurs next year there is only 1 or 2 more dividends after the current dividend. So franking becomes less of a valuation issue.

If BHP PLC continues to trade at a significant discount then wouldn't it make sense to sell the AUD shares and just buy the UK shares, or for a new investor to not buy the AUD shares and just buy straight into the UK market and wait for conversion?

All other factors being equal, whilst this arbitrage exits, does this mean that there will be selling pressure on BHP Aus share prices? And will this selling pressure actually increase once BHP trades ex-dividends.

On the flip side: what happens to all the unit holders of BHP PLC, do they all want BHP Aus shares? Would smaller shareholders just exit as they wouldn't want to have their shares 'trapped' on a foreign exchange? Will this actually push down the share price of BHP PLC as the time for exchange gets closer?

Then we also have currency exchange risk over the next 12 months.

Interesting times. But some will be making money out of this.