Eluding flea's takeover bid costs Australian elephant $2 billion

After 4 years, the ``elephant'' has eluded the ``flea.'' Australia's largest company - Broken Hill Proprietary - has shaken off a protracted takeover gambit by agreeing to a $2.675 billion (Australian; US$1.9 billion) ``greenmail'' payoff.

In essence, the huge oil, steel, and mining conglomerate will pay $2.1 billion to buy back 20 percent of its shares from financier Robert Holmes `a Court. And BHP will chip in another $575 million to gain control of a subsidiary of Elders IXL Ltd. (a brewing and agricultural concern) which has a 19 percent stake in BHP.

The complex mega-deal was announced last week and produced front page ``DEAL OF THE DECADE'' headlines here. With a market capitalization of $9.8 billion, the ``Big Australian,'' as BHP is dubbed, constitutes about 10 percent of the Australian stock market. Its sales alone make up 3 percent of the country's gross domestic product.

In the United States, the spoiled takeover scenario would be roughly comparable to the top brass at General Motors or International Business Machines eluding a double-barreled bid by corporate raiders T. Boone Pickens and Carl Icahn.

While the deal is a victory for BHP management, all sides stand to benefit, most analysts say.

BHP executives can get back to corporate development strategy and ``stop worrying about losing their jobs next week,'' says William Etheridge, director of research at Merrill Lynch (Australia) Pty. Ltd. in Sydney.

BHP books will get a bit redder, with the debt-to-equity ratio rising from 45 percent to 53 percent. But the greenmail bill isn't considered onerous.

``It won't put a crimp in their oil and mineral exploration,'' Mr. Etheridge says. And retiring the shares repurchased from Mr. Holmes `a Court will bolster its earnings per share, which should make BHP stock more attractive.

Elders IXL chief John Elliott, a latecomer to the takeover, will make a handsome profit from selling back shares to BHP and also regain control of his own firm. Part of this elaborate deal requires BHP to sell its 18 percent in Elders.

Holmes `a Court's Bell Resources will take a $296 million loss on the original BHP stake. But Bell is now out of a liquidity bind. The $1.9 billion BHP payoff will improve cash flow (by wiping out nearly all debts) and provide cash for future investments.

It was Holmes `a Court who put BHP into play in August 1983. At the time, when he made his bid through a small tractor company, it was derided as a flea tackling an elephant. His first offer netted less than 1 percent of BHP shares. But he didn't quit. He took three more runs at BHP, each time snatching more shares. By May 1986, the flea had 29 percent and a seat on the BHP board.

One of the key questions now is, what will Holmes `a Court do next?

``He's cashed up. He could go after anything, anywhere - here or around the world,'' says Etheridge.

Holmes `a Court has been selling off assets with abandon since the Oct. 20 stock market crash. (The partial sale of his stake in Texaco last month to Carl Icahn is believed to have helped trigger the resolution of the Texaco-Penzoil dispute.) To date, Holmes `a Court has raised $4.56 billion.

``Prior to the crash, he was a raging bull,'' says Ian Story of Holmes `a Court. ``Now he's jumped into a telephone box and come out as a new creature, a bear-market creature,'' says Mr. Story, research director at BZW Meares, a Sydney brokerage firm.

Story predicts that, positioned for a market decline, Holmes `a Court will wait for cheaper prices before buying anything else. And if BHP shares should fall as low as $5 a share, the saga of the Big Australian may not be over, he says.

Bell still holds 10 percent of BHP and has agreed not to raise its stake unless in a cash bid for all shares. Story says, ``A $6-per-share bid would cost Holmes `a Court about $7.5 billion. That's a tall order.'' But Story, paraphrasing a Beatles song, says, ``He could do it with a little help from his friends.''