In an overwhelming vote of confidence, shareholders of BHP Billiton Limited (ASX: BHP) have given their approval for South32 to be spun-off from the mining behemoth. While you can read more about the implications of that transaction here, there are also six reasons why South32 could be a great investment for investors:
1. Improvements
One of the key attractions to spun-off businesses is that they are often rundown or neglected business units that management believe can improve as a standalone.
That is certainly the case with South32. While BHP has focused on improving its iron ore, petroleum, copper and coal divisions, it has neglected those assets or commodities that it considers to be 'non-core' to its ongoing success. These unwanted businesses will become the primary focus of South32's management, leaving plenty of room for cost and efficiency improvements to be made.
2. History
Historically, spun-off businesses have, in large part, gone on to generate stronger returns than those of their parent entity, and the market as a whole. Recent examples include Orora Ltd (ASX: ORA), which was formed from Amcor Limited (ASX: AMC), and Recall Holdings Ltd (ASX: REC) which was spun-off from Brambles Limited (ASX: BXB). If history is anything to go by, South32 will be the same.
3. Solid Foundations
When a company demerges a business unit and gifts it to investors, it does not want to see it fall flat on its face. Should the new entity struggle, it can create bad publicity for the parent company while the original shareholders will also feel let down. As such, BHP Billiton will ensure the business starts life with a strong balance sheet (estimates suggest South32 will have a net debt of US$674 million which is significantly below analysts' early expectations).
4. Acquisitions.
To expand on the above point, South32's strong balance sheet and minimal debt will put it in a strong position to acquire new assets. Indeed, this is fantastic given the heavy falls in commodity prices recently (which could allow it to buy assets at significantly discounted prices).
5. Disciplined Management
South32 will be led by Graham Kerr, who has served as BHP Billiton's Chief Financial Officer for three years. As reported by the Fairfax press, Kerr is committed to focusing on organic growth early in the company's life. Although it will have the capacity to go on a spending spree for new businesses, it is just as pleasing (if not more so) to see management remaining disciplined to wait for better buying opportunities.
6. China
Unlike most of Australia's other miners, including BHP, Fortescue Metals Group Limited (ASX: FMG) and Rio Tinto Limited (ASX: RIO), South32 will not rely on China to generate its sales. According to Bloomberg, as little as 11% of South32's sales will come from China with a greater reliance being put on Europe and nations in southern Africa. This could be a good way for investors to play Australia's resources sector without the same exposure to China.
South32 will begin trading on the ASX on 18 May, but while you wait, there are plenty of other great investment opportunities (particularly after the market's recent sell-off).
