Shareholders in Rio Tinto Limited (ASX: RIO) may have something to cheer about amid the market turmoil with media speculation that the iron ore giant may follow in the footsteps of BHP Billiton Limited (ASX: BHP) in divesting non-core assets.
That may not sound very exciting or sexy as receiving a takeover bid but history has shown that divestments are usually a significant value adding event for investors, perhaps even more so than capital return events (such as share buy-backs) that seem to be a prevalent theme in the market.
Rio Tinto is rumoured to be considering a full or partial ASX-listing for its Pacific Aluminium Division, according to a report in the Australian Financial Review.
These assets were acquired as part of its disastrous US$38.1 billion takeover of Alcan in 2007 after entering into a bidding war for the business with Vale SA and Alcoa Corp.
But these are just rumours at this stage and the market may be sceptical about Rio Tinto’s ability to on-sell these assets either in a straight sale or by floating the business.
The miner failed to sell the assets to a trade buyer twice before. It hired Deutsche Bank to hunt out interested parties and field offers last year and engaged Credit Suisse in 2015 to undertake the same process.
Rio Tinto was also unsuccessful in floating Pacific Aluminium a few years ago and it remains to be seen how excited investors will be to support a spin-off in this volatile market with just about every asset class being whipsawed by the spike in US Treasury yields.
There is also considerable uncertainty over the potential market value of Pacific Aluminium, which has smelters in Australia and New Zealand. Some analysts think these assets are worth under US$2 billion while others think these are worth twice that.
But BHP’s experience with the float of South32 Ltd (ASX: S32) leaves few doubts in my mind that such a divestment would be a good outcome for investors.
South32 has more than doubled in value since its float in 2015 when the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) is up around 6%.
South32 is not an isolated case either. Most similar castoffs have also performed very strongly after being divested from their parent companies.
The demerger of paint company DuluxGroup Limited (ASX: DLX) from chemical group Orica Ltd (ASX: ORI) in 2010 and energy company Origin Energy Ltd (ASX: ORG) from building materials supplier Boral Limited (ASX: BLD) in 2000 are just a few examples.
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Motley Fool contributor Brendon Lau owns shares of BHP Billiton Limited, Boral Limited, Rio Tinto Ltd., and South32 Ltd. The Motley Fool Australia has no position in any of the stocks mentioned. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. This article contains general investment advice only (under AFSL 400691). Authorised by Bruce Jackson.
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