BHP pursues South32 demerger to maximise shareholder and productivity value

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The BHP Billiton board has advised its shareholders to vote in favour of the demerger of South32 ahead of the company’s shareholder meetings on 6 May 2015, saying both entities will benefit if the South32 assets are separated from BHP Billiton.

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The giant miner said that by simplifying its portfolio to its core petroleum, copper, iron ore, coal and potash assets – which accounted for 96% of the Group’s Underlying EBIT in the 2014 financial year – it will be better placed to unlock shareholder value and achieve further productivity benefits, while creating a new global diversified metals and mining company with a significant industry presence in each of its major commodities.

“Following the demerger, BHP Billiton will remain one of the largest diversified global resources companies and its strategic priorities will not change. The demerger simplifies BHP Billiton and enables us to further focus on generating value from our core portfolio,” said BHP Billiton Chairman, Jac Nasser.

South32’s portfolio is comprised of large, high-quality assets including alumina, aluminium, coal, nickel, manganese, silver, lead and zinc, the majority of which are competitively positioned in the first or second quartile of their respective industry cost curves.

The company has meaningful reserve lives to support future production without the immediate need for material incremental capital expenditure and has been cash generative over the last three years despite falling commodity prices.

Following the demerger, South32’s head office will be in Perth, Australia, whereas a regional head office and global shared services centre will be located in Johannesburg, South Africa.

South32 Chief Executive Officer Elect, Graham Kerr said the separation will see South32 adopt an independent business strategy and pursue value accretive investment opportunities that may not otherwise be pursued if its assets remained within BHP Billiton.

“We are building a new company from the ground up. We will have competitive assets, significant reserve lives and financial strength. We will benefit from the best of BHP Billiton’s approach to productivity and will create a culture that empowers our people.”

According to the press release by the BHP Board, the total one-off costs of implementing the demerger are estimated to be approximately US$641 million after tax, including stamp duty and cash tax of US$339 million, South32 set up and separation costs of US$254 million, execution costs of US$145 million, as well as financial advisor costs of US$30 million.

The company expects that a simplified portfolio will enable it to streamline its organisational model and generate functional cost savings of approximately US$100 million per annum, with 90% of this saving achieved by the end of the 2017 financial year.

“This saving is in addition to the reduction in costs resulting from the removal of the South32 businesses. One-off restructuring costs of approximately US$55 million (pre-tax) are expected to be incurred in connection with implementing the organisational changes required to achieve these savings,” it says in the press release.