We’ve become increasingly more constructive on the BHP-WPL deal.
The strategic rationale was clear enough (consolidate assets, run them more efficiently, optimise growth projects and capex accordingly), but the price wasn’t obvious to us.
Both companies modelled out the respective cashflows generated by their own, and each others, asset bases, with oil and gas pricing inputs and production/remediation plans, that we couldn’t see, details we couldn’t access, to settle at the number of 48/52. Which meant taking the deal on faith, to a degree.
In the interim, there’s been enough publicly available modelling shared (brokers, investment banks, our own modelling efforts) to suggest that WPL will acquire these assets at an EV/EBITDA of approximately 4x, pre synergies.
For highly cashflow generative assets, with an (at the moment) pricing and demand tailwind, this de-risks the WPL investment thesis sufficiently for us to feel comfortable holding the shares towards the vote (some time away).
For those convinced that the deal was a major negative overhang on the share price, it does seem more akin to a handful of percentage points, at most, based on the event study below (study is perhaps too generous a term, but we examine the normalised pricing trajectories of oil and gas majors in the lead in, and subsequent performance, after the deal was announced).
Idiosyncratic variation explains a bit, but mostly it was the lower oil price, which traded weakly on the back of the delta outbreak (which worsened globally over August).
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