[miningmx.com] – THE decline in the shares of BHP Billiton in the hours after its eagerly awaited demerger announcement would appear to be a reflection of investor disappointment that a special dividend or share buy-back was not declared rather than a response to the group’s demerger proposal.
“Although we think the demerger strategy looks sound and will likely benefit shareholders, it’s nowhere near as tangible as a share buy-back,’ said UK stockbroker, Numis Securities in a morning note.
It was a view expressed by Macquarie Research which commented that the positives of the unbundling of the group’s less competitive assets were “… understandably being overlooked “… given the absence of a buyback and the fact that UK shareholders will now receive Australian listed stock’.
BHP Billiton had suggested that were net debt reined-in to $25bn, it would return some value. As it happened, net debt for the year ended June came in at $25.8bn, slightly above expectations, but perhaps close enough.
Instead, shareholders in the UK in particular, some of which may not be mandated to hold shares in Australian- or South African-listed companies, which is where the demerged company will be floated, will most likely sell the shares.
If anything, the disappointment as reflected in BHP Billiton’s share price validates the group’s long-term strategy in distancing itself from its poorer assets: it shows just how important value over capital growth has become to the investment world.
Of course, BHP Billiton CEO, Andrew Mackenzie, talked up the assets identified for unbundling.
They were “BHP engineered’, and they resided in the top two quartiles of cost competitiveness. In fact, Nickel West, the Australian business, was considered too mature, too marginal to take its place among the mines and processing facilities of Spinco which include the manganese, coal and aluminium assets of South Africa.
Yet these assets are ultimately discards. A slide in BHP Billiton’s presentation shows that the core assets, those retained in BHP Billiton, had an underlying pretax margin of 48% versus the 41% achieved by the larger group.
For BHP Billiton, then, this is a highly positive move. It will be easier for investors to understand the group, and it may allow BHP Billiton to better attract capital knowing that allocation will be for tier one assets only, and not clouded by competition for capital by riskier businesses.
“Overall, while we are not convinced that the spin out will create significant value, the strategic positives are clear,’ said Macquarie in a note. But what of the Little Billiton it has created. Will it be a success?
That’s less certain although the unbundling of Gold Fields, for instance, yielded a company in Sibanye Gold that – married with the right management – has done extraordinarily well. Sibanye Gold wobbled at first but its share price is double its February 2013 IPO.
Consequently much rests on the shoulders of the Newco’s nominated CEO, Graham Kerr, and the quality of the management team that gravitates around him. BHP’s current head of investor relations, Brendan Harris will be the firm’s CFO; its chairman is David Crawford, BHP’s longest serving director with some 20 years under his belt at the company.
Interesting, too, to know if the Newco will seek yield or combine it with an opportunistic growth strategy that suits smaller companies with perhaps quicker decision-making processes.
By listing in Perth – a development that’s aroused alot of enthusiasm in Australia on the evidence of the press given to it – Newco would seem to be positioning itself among the country’s great entrepreneurially led companies such as Fortescue Metals Group which is capitalised at A$14bn.
It’ll also be interesting if BHP Billiton’s rivals, Rio Tinto (aluminium and alumina division) or Anglo American recognise in the demerger a quick route to portfolio simplification.
Already, Anglo American Platinum has suggested that in the absence of competitive bids for its non-core platinum assets, it would float the mines in a separately listed vehicle. No doubt it will be taking notes over the months to come.
