With the designated day fast approaching for BHP Billiton Limited (ASX: BHP) to hive off certain assets into a separate ASX-listed vehicle to be known as South32, shareholders and investors alike need to decide whether they want South32 in their portfolio or not.
Previous spin-offs from BHP have had a mixed track record depending on your viewpoint, but in general it would be fair to say they have left much to be desired…
Arrium Ltd (ASX: ARI) which was spun-off in 2000 under the title of OneSteel was, at the time, solely focussed on manufacturing steel products for the domestic market and distributing them throughout Australia and New Zealand.
In 2005, the Arrium board decided to diversify into the resource sector. This strategy involved a $400 million investment into the Whyalla Steelworks to convert the plant to magnetite iron ore feed thereby freeing up Arrium's hematite iron ore assets for export sales. At that time this created a new line of revenue for the group and the strategy made sense as it allowed the firm to benefit from the boom time prices in iron ore. Today however, with the iron ore price at multi-year lows and Arrium's share price languishing at 17 cents, well….
The current share price comes after an incredible roller-coaster ride. BHP shareholders who held the stock from 2000 until 2008 enjoyed multi-bagger gains. The stock listed around the 70 cent mark, traded in the $2 to $3 range in 2005 and went as high as $6.27 in mid-2008 before ultimately heading down to the all-time lows of today.
It has been a similarly painful and disappointing experience for long-term shareholders in BlueScope Steel Limited (ASX: BSL). BlueScope (previously called BHP Steel) became an independently listed steel company in mid-2002 incorporating well known steel brands such as COLORBOND and LYSAGHT after it was spun-out from its parent BHP.
After listing at around $11 the stock rallied to a high of $51.53 in 2007 before reversing its course and falling as low as $1.47 in mid-2012. The shares are currently trading at $4.49.
Decisions, Decisions
There are plenty of historical precedents for spin-offs to perform well and South32 could certainly turn out to provide good returns to shareholders over certain time frames and perhaps even the very long term.
Recent spin-offs such as Orora Ltd (ASX: ORA) from Amcor Limited (ASX: AMC), which has provided Orora shareholders with gains of around 94%, compared with a gain of 38% in Amcor, are an example of how shareholder value can be created.
When it comes to the specifics of BHP's track record in demergers however, long-term investors should keep a close eye on South32's fundamentals.
