In an update to the market this morning, BHP Billiton Limited (ASX: BHP) reiterated that a demerger of South32 Limited would be the preferred approach to achieving portfolio simplification and unlocking shareholder value, with the Board recommending shareholders vote in favour of the proposal.
As it stands, BHP Billiton has interests in 41 assets across 13 countries although its primary focus is on iron ore, coal, petroleum and copper. Should the South32 demerger receive the necessary shareholder approval, BHP Billiton would spin-off its 'non-core' assets, thus allowing both entities to focus on their own growth trajectories.
In the filing, the company said: "The demerger materially simplifies the portfolio in a single step and is significant progress towards achieving BHP Billiton's identified core portfolio of 19 assets across eight countries and three continents."
Here are some of the most important things you need to be aware of:
The proposal:
- The demerger that will create South32 Limited will cost an estimated US$738 million ($965 million). This includes stamp duty (US$339m), set-up and separation costs (US$254m) and execution costs (US$145m). However, the miner believes it will easily pay for itself in the benefits realised.
- South32 would hold the aluminium and manganese business, nickel in Cerro Matoso, energy coal in South Africa, silver-lead-zinc mines in Cannington and metallurgical coal in Illawarra. These assets generated an estimated US$8.3 billion of revenue in the 2014 financial year
- Shareholders will vote on May 6 for the proposal
- Each investor would receive 1 (one) share in South32 for each BHP share held
- South32 will begin with roughly US$674 million in net debt
- South32 intends to distribute a minimum of 40% of underlying earnings as dividends following each six-month reporting period (notably, it will not uphold its parent's progressive dividend policy)
Advantages:
- Expected to drive substantial productivity benefits in the long term, beyond the US$4 billion per annum already targeted
- Both entities can focus on their own growth paths. The 'non-core' assets will no longer have to compete with BHP Billiton's core assets
- BHP Billiton's net debt would improve slightly
- Shareholders can choose their level of exposure to the core and non-core assets
Disadvantages:
- BHP Billiton will lose some of its diversification
- Significant initial costs
- Some analysts have questioned the timing of the spin-off, given the price collapse of some of BHP Billiton's key commodities (particularly iron ore and petroleum)
Investors should be aware that spin-offs have historically delivered strong performances in their first few years of listed-life. Orora Ltd (ASX: ORA), which demerged from Amcor Limited is one great example, as is Recall Holdings Ltd (ASX: REC) which demerged from Brambles Limited.
All in all, it appears that the benefits of the South32 demerger far outweigh the disadvantages. By spinning off its unwanted assets, BHP Billiton will be able to focus on improving productivity and efficiency measures, while significant value could also be unlocked for shareholders. As such, it appears that investors should vote in favour of the proposal which would likely see South32 list on the ASX around the middle of this year.
