23 Apr 2015
BHP Billiton (BHP) has announced details of the proposed demerger of their non-core assets: the proposal will split the company into two separately listed companies, BHP and South32, via an in-specie distribution of South32 shares.
If approved by shareholders on 6 May 2015, BHP will be focused on its upstream tier one (core) assets consisting of a portfolio of 19 assets with a smaller geographical spread and a higher proportion of common characteristics.
South32 will be a new diversified metals and mining company with a complementary portfolio of quality assets with the freedom to adopt a tailored strategy and no longer have to compete with BHP’s core assets. South32 will become the twentiest largest listed company in Australia.
Eligible BHP shareholders will receive one South32 share for each BHP share they own.
For more details, please read our 'Stock insight: BHP demerger' from March 2015.
Is any action required?
We believe that BHP’s current share price is depressed due to investors' unwillingness to own BHP’s non-core assets. The demerged companies will appeal to different investor preferences. It will also make South32 a more appealing and easier acquisition target for competitors who may wish to acquire the whole company or selectively purchase assets which are complementary to them.
The demerger will simplify BHP in a single step, whilst providing the opportunity for South32 to maximise the value of its assets. BHP will earn higher margins with no material change in earnings/margin volatility.
Overall, we think the demerger is a positive outcome, however, with greater positives for BHP.
There is limited information available regarding the South32 pre-listing sale facility (e.g. price), and an increasing likelihood (given the information currently at hand) of receiving a better price for South32 shares post-listing.
As such, we believe shareholders should retain the South32 shares they receive (i.e. make no election to Sell into the pre-listing sale facility and ignore the sale facility document).
If you would like to discuss this with your PSK adviser, please call us on (02) 9324 8888 or click here.