Shareholders approve BHP Billiton spin-off South32

BHP Billiton investors have approved one of the mining sector's most important restructurings as they voted to split the Anglo-Australian company in two by spinning out a new metals producer.

The new company, South32, will start trading on stock markets this month after Wednesday's vote in dual shareholder meetings in Australia and the UK. South32's main assets are mines and smelters focused on coal, manganese, aluminium and nickel. BHP will concentrate on copper, iron ore, and energy resources including coal, oil and gas.

The spin out concludes BHP's nine-month long effort to divest unwanted assets.

Last year South32 would have generated revenue of $8.3bn as a standalone company. BHP reported revenue of $67bn in its last financial year, including the South32 assets.

BHP, the world's largest mining group measured by its £88bn market capitalisation, is responding to a less profitable period for the industry - due to falling commodity prices - by concentrating on a handful of large assets.

Miners have been put under financial pressure by slowing economic growth in China, the dominant source of demand for natural resources over the past decade, and by their own decisions to ramp up the supply of several commodities, including iron ore.

"We are confident that the demerger will create two successful companies," Jac Nasser, BHP's chairman, told investors at meetings held simultaneously in London and Perth.

The creation of South32 unwinds most of the merger between Australia's BHP and UK-listed Billiton in 2001, a deal that helped to propel the combined company to leadership of the mining industry during the China-fuelled commodities boom.

BHP is now saying it wants to simplify its business. It will still be the world's most valuable miner after the split, and the remaining assets in the group generated 96 per cent of last year's earnings before interest and tax.

Although there have been complaints from investors about the timing of the merger, Mr Nasser said the split was not affected by the commodity cycle. BHP shareholders will be given South32 stock and can decide whether to sell them now, when prices for both commodities and mining company shares are low, or wait for a recovery.

"It does not crystallise value for shareholders at a particular point in the cycle and generally gives shareholders an ownership choice," he added.

BHP itself will not retain a stake.

Estimates of South32's expected market capitalisation vary markedly - analysts have valued the company at between $7bn and $12bn, reflecting uncertainty over commodity prices. BHP has placed a net value of $13bn on South32's assets.

"Where the marketplace will come out is where [it] will come out . . . there is no point in speculating," Mr Nasser said.

Graham Kerr, who was BHP's chief financial officer before becoming South32's first chief executive, said his company would focus on productivity, growing cash flows and building investor confidence in management in the six months following the demerger.

He added that South32's low debt would differentiate it from many of its rivals in the industry, enabling the company to operate through commodity cycles and take advantage of acquisition opportunities in the future.

"We are not overleveraged," Mr Kerr said. "We don't have that problem that a lot of our peers have in the industry We will look, we will be aware of M&A opportunities but we will only pursue those if we have the mandate from our shareholders."

Asked about speculation that South32 would become a takeover target if it attracted a low valuation, Mr Kerr said the company would focus on things it can control, including safety and financial performance.

"The speculation around M&A is always going to exist . . . what I would say is that obviously the way people value South32 will be driven by their view of commodity prices," said Mr Kerr.

Executing the split will cost BHP more than $700m, including taxes.

The plan was initially poorly received among many UK investors partly because it originally called for South32 to be listed only in Australia and South Africa.

BHP later announced it would seek a secondary listing for South32 in London but the stock is expected to be sold by many UK investors as it will not be eligible for inclusion in the UK indices.

BHP has also sought to gain support for the split by promising not to cut its dividend and restating its aim to increase this payout every year.

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