17th Mar 2015 11:00
LONDON (Alliance News) - Mining giant BHP Billiton PLC Tuesday recommended shareholders approve the proposed demerger of South32 to allow the group to streamline its activities and make cost reductions, and said both companies remain committed to its dividend policies.
"The demerger will simplify BHP Billiton and has the potential to unlock shareholder value, while creating a new global diversified metals and mining company with a significant industry presence in each of its major commodities," said Chairman Jac Nasser.
BHP currently has interests in assets across 13 countries in six continents. The miner is proposing retaining its core portfolio of 19 assets based in eight countries over three continents, which generated 96% of the company's underlying earnings before interest and tax in 2014, and separating its less profitable assets to South32.
If separated, the majority of South 32's assets will be based in the southern hemisphere, mainly focusing on Australia and South Africa to produce alumina, aluminium, coal, nickel, manganese, silver, lead and zinc.
In total, South 32 would be operating in Australia, South Africa, Mozambique, Brazil and Colombia with ten already producing assets.
That would leave BHP focusing on on oil and gas assets in the UK North Sea, Algeria, Pakistan, Venezuela and Australia, alongside the New Mexico coal project in the US. BHP would also retain its numerous copper assets in Chile and Peru.
"We will maintain our progressive dividend policy and do not plan to rebase the dividend as a result of the demerger, thus implying a higher payout ratio," said BHP in a statement.
In addition, BHP said South32 intends to distribute a minimum of 40% of underlying earnings as dividends to its shareholders following each six month reporting period, beginning from the period ending December 31, 2015.
"Consistent with South32's priorities for cash flow and commitment to maximise total shareholder returns, other alternatives including special dividends, share buy-backs and high return investment opportunities will compete for excess capital," said BHP.
The total one-off costs of implementing the demerger are estimated to be approximately USD738 million or USD641 million after tax. These comprise stamp duty and cash tax of USD339 million, South32 set up and separation costs of USD254 million and execution costs of USD145 million, including financial advisor costs of USD30 million.
BHP Billiton said it intends to streamline its organisational model and expects this to generate functional cost savings of approximately USD100 million per annum on a pretax basis, with 90% of this saving to be 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 USD55 million are expected to be incurred in connection with implementing the organisational changes required to achieve these savings.
In the longer term, following the simplification of its portfolio and streamlining of organisational design, BHP Billiton believes it will be able to further focus on improving the performance of its core operations and achieving substantial productivity benefits beyond the USD4 billion per annum of productivity-led gains by the end of the 2017 financial year already targeted.
South32 is expected to incur additional costs of approximately USD60 million per annum before tax associated with operating as a stand-alone listed company relative to those incurred operating the South32 businesses as part of the BHP Billiton Group. However, these additional ongoing overhead costs are expected to be outweighed in the near term by the ongoing savings generated by South32's regional model.
The proposed demerger would be effected via a distribution of South32 shares by way of an in-specie dividend to shareholders in both BHP Billiton Ltd and BHP Billiton PLC. Eligible BHP Billiton shareholders will receive one South32 share for every BHP Billiton share held on the applicable record date.
The company noted that South32 will apply for its shares to be admitted to trading on the Australian Securities Exchange, London Stock Exchange and Johannesburg Stock Exchange and will have an over-the-counter American depositary shares programme in the US.
"Having assessed a number of alternatives, the BHP Billiton board considers the demerger to be the preferred approach to achieving simplification of our portfolio and maximising shareholder value. The board unanimously recommends that shareholders vote in favour of the demerger," said Nasser.
Shareholders will vote at the meeting booked in for May 6.
BHP shares were up 1.7% to 1,440.00 pence per share on Tuesday morning.
By Joshua Warner; [email protected]; @JoshAlliance
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