BHP and Woodside deal is smelling of roses

BHP Woodside deal ASX BHP WPL oil gas
With rocketing energy prices, Woodside shareholders are expected to approve its acquisition of BHP’s oil and gas assets when they vote next month.

If you are looking for an early candidate for deal of the year, the BHP (ASX: BHP) plan to demerge its oil and gas assets into Woodside Petroleum (ASX: WPL) will be hard to beat.

When it was first announced on 22 November 2021, the deal looked like a neat way to “decarbonise” BHP by removing its extensive oil and gas businesses and at the same time turn Woodside into a top 10 independent global energy company by production.

Since that time, the dynamics of the deal have changed quite sharply with the Ukraine invasion transforming the outlook for energy prices.

Rocketing energy prices increase the attraction

The design of the deal accommodated those changes because BHP shareholders get 48% of the enlarged Woodside, while Woodside shareholders get 52%.

If the deal had been a conventional takeover with a price offered rather than an agreed merger of assets paid for by shares, it would have died as soon as energy prices rose.

However, rocketing oil and gas prices and a growing realisation that the combination of the BHP and Woodside petroleum assets greatly increases value, geographic diversity, growth potential and financial strength have only sweetened the attraction of the deal for both sets of shareholders.

Woodside shareholders expected to agree to the deal

Now that independent expert KPMG Corporate Finance has given the deal the thumbs up, that is expected to result in approval of the deal by Woodside shareholders when they meet on 19 May.

Assuming that meeting votes for the deal, there would be very few hurdles left to stop it completing on 1 June 2022, with BHP to then distribute the Woodside shares to BHP shareholders.

BHP shareholders don’t need to vote on the deal but the reaction has been positive so far, although some may wish to sell their Woodside shares if they are concerned about the future of oil and gas or about climate change.

Of course, there are many uncertainties in holding Woodside shares – future demand for oil and gas, the cost of remediating sites, of having stranded assets after closures and of financing projects amid climate change restrictions.

All of these problems would have applied to BHP had it hung on to its oil and gas assets so for BHP shareholders having two sets of shares – a “clean” BHP and Woodside – greatly improves their position.

Apart from the industrial logic of the deal, there is another aspect which is its very interesting design for shareholders.

Franked dividend adds yield “cherry”

Many shareholders in BHP are focussed on income and the company has outperformed in that regard with hefty dividends as its iron ore business has boomed.

Those investors – particularly low or no tax shareholders – have therefore responded very positively to the structure of the deal which will see the Woodside shares issued as a franked dividend.

This means that despite the share issue being a taxable event, most shareholders will get the shares with few taxation implications but those with lower or zero tax rates may get some extra yield from the transaction, with the franking credits adding up to an estimated 5.1% yield.

At a time when income from fixed interest investments have been tiny that sort of extra tax effective yield is like a cherry on top of what is already looking like one of those rare win/win transactions on the share market.

It is also an attractive way for BHP to use its accumulated franking credits, which accrue from its company tax payments, to help execute deals like this.

It also showcases one of the great benefits of the dividend franking system, which encourages companies to pay corporate taxes so that they can then distribute those franking credits to their shareholders.

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