Investors have given BHP Billiton Limited (ASX: BHP) the nod of approval to spinoff South32 following the group's Annual General Meeting (AGM) earlier this week.
In an overwhelming result, more than 98% of shareholders voted in favour of the separation.
While it is rare for a miner to want to reduce its size, BHP recognised that by spinning off its unwanted assets, both parties would be able to focus on their own growth paths to ultimately produce greater total shareholder returns. Essentially, the 'non-core' assets of BHP Billiton will become the primary focus of South32's management team.
With the new entity set to list on the Australian, London and South African securities exchanges from May 18, here are some of the main points that every investor needs to know:
The Demerger
- For every BHP Billiton share owned, investors will receive one new share in South32.
- Shares are expected to trade somewhere between $2 and $3.50 each, as reported by the Fairfax press.
- Its primary listing will be on the ASX, while it will have secondary listings in Johannesburg and London.
- South32 shares will begin trading on a deferred settlement basis on 18 May, with normal trading commencing on 2 June.
- BHP estimated that the spinoff would have a pre-tax cost of US$738 million, but could save up to US$100 million in costs per annum as a result.
- BHP remains committed to its progressive dividend policy. The demerger should allow for greater total shareholder distributions.
The Business
- Early estimates suggest the company could be worth up to $20 billion but many analysts have revised their forecasts due to falling commodity prices.
- South32's CEO is Graham Kerr, who has been BHP Billiton's Chief Financial Officer for three years.
- The spin-off will have a strong balance sheet, putting it in a good position to buy new assets. However, as quoted by Fairfax, Mr Kerr would rather wait for more opportunistic prices to begin acquiring assets as opposed to buying them straight away, meaning its focus will be on organic growth.
- South32 will start with an estimated net debt of US$674 million.
- South32 will receive the 'non-core' assets and commodities, including manganese, silver, lead, thermal coal, nickel and zinc. It will be the world's biggest producer of manganese.
- BHP has said that South32's assets contributed net profit after tax of US$738 million for the six months ended 31 December 2014.
- South32 will not share the same reliance on China as other miners such as BHP, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO) do. According to Bloomberg, China will account for just 11% of South32's overall sales.
- South32 will have a greater reliance on southern African and European nations to generate sales.
What should you do with your South32 shares?
Given the current state of the resources sector, investors will be wondering whether they should keep their South32 shares, or else offload them at the earliest opportunity possible.
While it is unclear exactly what value the entity will carry, there are reasons to suggest it could be worth holding onto. In fact, it could outperform BHP Billiton and even the Australian share market in general.
Although that might seem like a big call, spin-offs have a strong history for delivering market-beating performances – just look at Orora Ltd (ASX: ORA) and Recall Holdings Ltd (ASX: REC), which were spun-off from Amcor Limited (ASX: AMC) and Brambles Limited (ASX: BXB), respectively. Over the last year, the pair are up 51% and 55%, compared to the S&P/ASX 200 (Index: ^AXJO) (ASX: XJO) which has risen just 3%.
By separating itself from BHP, South32 will be able to focus on the assets that have largely been neglected in recent years in favour of BHP's core assets (being iron ore, petroleum, coal and copper). This will give South32 an amazing opportunity to dramatically improve its operating efficiencies, thus forcing down costs and increasing overall profitability.
Given that 98% of investors voted in favour of the demerger, it is clear that expectations are high for South32 to deliver on its promises. In my opinion, investors should certainly hold onto their South32 shares.
