Late last week BHP Billiton Limited (ASX: BHP) shareholders voted in favour of the monumental splitting of the company into core and non-core asset groups, with the non-core parts to be listed as a separate company named South32. This process, called a de-merger has previously created value for shareholders over the long term by allowing management to concentrate on the most important parts of the business.
De-Mergers Create Value
Recent examples of de-mergers include Orora Ltd (ASX: ORA), which was spun-off from Amcor Limited (ASX: AMC), and Recall Holdings Ltd (ASX: REC) which came out of Brambles Limited (ASX: BXB).
A 2013 UBS study found that over the 12 months following separation, the demerged company (South32 in this case) outperformed the market return by 10.7% and outperformed the parent entity (BHP) by 8.5% (22 demergers since 1997). Additionally, a CIMB Group study around the same time found that the demerged group's share price rose an average of 9.5% per annum following separation (17 demergers since 2002).
Two more brokers, Macquarie and Morgan Stanley, have recently revisited the performance of stocks following a demerger. They both concluded that the longer the time from demerger, the larger the outperformance of both companies against the market.
A Slow Start
The analysis concluded that South32 may well have a slow start to life as not every shareholder can or will want to hold onto both companies. This is especially so because index funds will sell the smaller company because it falls outside their investing rules.
Long Term Growth
The studies found that long-term outperformance is especially common if either of the companies are a takeover target or are acquiring assets. An example of this is Recall, its share price has doubled as investors speculate on whether it will be acquired.
The biggest question for investors however, is how both companies will be affected by commodity prices. BHP's share price has gone essentially nowhere over the last five years, as the iron ore price reached unsustainable highs and then returned to a much lower level.
