BHP Demerger Announcement
On Tuesday night, in tandem with their full year result, BHP announced a proposal to demerge the company’s non-core assets into a new vehicle (currently referred to as NewCo) with the aim of maximising value for shareholders.
The logic behind the decision
BHP derives 97% of underlying EBITDA from their five main commodity operations: Iron Ore, Copper, Petroleum, Coal and Potash. BHP argues that these are the most attractive resources, as they generate the strongest margins and retain the most worthwhile investment options. As such BHP believes that it is in shareholders’ interests for management to focus their time and effort on running these business units to the best of their potential.
The creation of NewCo, and subsequent divestment of BHP’s non-core assets, will free the time of each company’s dedicated management teams to focus on running their respective businesses. The aim is to optimise performance and improve productivity at a faster rate than if the entities remained combined.
How will it work?
It is intended that NewCo will be an ASX listed entity, with a secondary listing on the Johannesburg Stock Exchange. Existing shareholders in BHP will keep their original shares, while also receiving a pro-rata distribution of shares in NewCo.
The demerger decision is by no means final, and will be put to a shareholder vote following the satisfaction of a number of regulatory and tax-related requirements. BHP has stated that they intend to provide an update in November 2014, with a view to listing NewCo in mid-2015.
What’s behind the recent share price moves?
BHP rallied quite hard into the result, which suggests to us that the market had high expectations. While the result was definitely strong, it lacked any real surprises and subsequently erased the gains of prior days. The real disappointment, in the eyes of many investors, was the lack of plans to return capital to shareholders – either by a share buy-back or capital return.
Additionally, even though the announcement of the demerger looks to be well founded, UK domiciled owners in BHP will receive ASX listed shares. As such there may have been some selling in the UK as investors exited the stock in anticipation of future disruption to the share register.
Thoughts on BHP
We believe that BHP remains an attractive vehicle for investors to gain exposure to the commodity sector. It has best in class assets, with long mine lives and low costs. The proposed demerger will enhance the underlying business as it will concentrate BHP’s operations into their highest returning projects and allow management to focus their attentions where they can generate the most returns.
If you are concerned about these changes we encourage you to speak to your adviser on 03 5559 7111.
If you’re not sure who to contact, ask to speak with me.
P: 03 5559 7111