Sydney view: BHP's international dream comes true

By GILES PARKINSON*

The former Big Australian is about to fulfil its dream of becoming the Big International. The merger of BHP and Billiton, priced at $A57 billion, creates the world's biggest diversified resources house and marries two companies that have surprisingly few overlapping assets.

The dual-listed structure means no transfer of money or assets, and offers the maximum financial flexibility for further growth, according to those involved.

If it isn't a marriage made in heaven, it is at least one made in what serves up as the equivalent for merchant bankers, who thought the deal was so beautiful they called it Brigitte Bardot. That's the positive spin on the largest corporate deal to be struck on Australian shores.

The deal, it seems, was inevitable: BHP needed an avenue for growth and a forum to attract the attention of international investors. And it needed to act before it was swallowed whole by another rival.

But how good is the deal for BHP shareholders? After the initial euphoria on Monday morning, the market did its sums and has taken 10 per cent off the value of the stock, and it was still falling yesterday.

The major cause for concern is the estimated $2 billion premium that BHP is paying for Billiton for the merger to go ahead as planned. The premium was based on the respective closing prices of the two companies last Friday, and while BHP shares have risen and fallen in quick succession, Billiton is up around 17 per cent over the past few days.

It has been an extraordinarily difficult merger to price, either because BHP was still suffering from the writedowns it was forced to incur from Magma Copper and its HBI plants, or because Billiton was trying to reduce its exposure to South Africa.

BHP is being painted as the dominant partner. The truth is that for many years it was a reluctant bride that refused to be dragged to the altar. It agreed in the end because it had no choice. Some analysts are already calling it a reverse takeover.

Billiton first suggested a merger with BHP when the South African giant was disentangling itself from Gencore in 1997, and the first signs of the Magma Copper disaster was emerging at what was still the Big Australian.

It made the suggestion again one year later after BHP's share price had slumped to its record low of $10 a share and the board had sent an SOS to the Texan pipes expert Paul Anderson. By the time Billiton came back for a third time last year BHP was ready to talk.

The mechanics of the deal - the dual- listed company - are a glimpse of the future for Australian companies wanting a presence on the international stage.

Rio has already acted, Brambles is considering a version of its own, and other major industrials will look for overseas bases.

It also offers extraordinary flexibility if they see further purchases down the line, because it can issue stock on any of the four major exchanges where it is traded - Australia, London, New York and Johannesburg.

The source of eternal regret for BHP shareholders is that the numbers are not quite as beautiful as they could have been. The share price is barely trading above its levels of 1996, and any future gains will be shared with Billiton, which within two to five years will be running the company, even if it is nominally based in Melbourne.

*Giles Parkinson is editor of AFR.com