PERTH, Australia-- BHP Billiton Ltd.'s shareholders voted
overwhelmingly Wednesday in favor of a breakup of the mining giant
into two different companies. But its soon-to-be-listed spinoff,
known as South32, will start life in a tougher environment than
when the plan was first mooted last year.
More than 98% of BHP's shareholders voted at meetings in London
and Perth, Australia, to support the split, in which it will
separate unwanted assets in commodities such as aluminum, nickel
and manganese into South32.
BHP's move to reduce its size is highly unusual in the resources
sector, where companies have prided themselves on pursuing growth,
often at the expense of profitability. But it comes as a downturn
in the price of many commodities has hit mining companies hard,
causing their shareholders to press for new strategies that will
improve returns.
When BHP announced its intention to split the company in August,
some analysts worried it would be jettisoning some of its
better-performing assets as prices for the handful of commodities
it planned to retain, such as iron ore and coal, weakened.
But analysts have since also downgraded their forecasts for the
metals South32 will produce. Concerns over nickel have grown as
China's economic growth rate has slowed--the metal is a key
component in making stainless steel. A long-awaited recovery in
aluminum prices has failed to materialize, while manganese prices
have slumped in recent months.
South32 CEO-elect Graham Kerr on Wednesday shrugged off concerns
about the new company's value and outlook.
"Commodity prices: It is a cyclical game, they will go up and
down," Mr. Kerr said in an interview.
Back in August some analysts estimated South32 might attract a
valuation of roughly $15 billion. Its assets had a book value of
$12.95 billion on Dec. 31, according to regulatory filings released
to the Australian Securities Exchange in March.
But some broker estimates for South32's value have now fallen to
as little as $7 billion, analysts at Investec recently said.
"The question about valuation is always interesting," said Mr.
Kerr, adding there was a large disparity in analyst estimates given
a broad range of views on future commodity and currency values. He
declined to disclose the company's own valuation estimate.
A weaker valuation could make South32 vulnerable to an approach
from a hungry acquirer. Mining veteran Mick Davis, former chief
executive of Xstrata PLC, has raised $5.6 billion for a new mining
fund, X2 Resources, which is searching for acquisition
opportunities, for example.
Mr. Kerr said speculation around possible potential suitors "is
always going to exist."
He said South32 could be a potential acquirer itself, given its
low-debt balance sheet, although Mr. Kerr said the company's focus
would be on organic growth.
BHP CEO Andrew Mackenzie has argued the separation will allow
South32's management to pursue their own tailored strategy, leaving
BHP to focus on a core suite of four to five commodities where it
benefits from economies of scale and strong market shares.
Mr. Kerr said support from investors for the breakup had "well
and truly surpassed" his own expectations.
Shares in South32 will start trading in London and Johannesburg
later in May, and in Sydney on June 2. Investors will receive one
share for every BHP share they own.
Many U.K.-based shareholders are likely to sell the shares they
are gifted in the new company, though, as the company will be
ineligible for inclusion in key stock market indexes, Citi analyst
Health Jansen said earlier this week.
Anthony Lee, an investor who has held BHP shares for about two
years, said he isn't sure if he'll hold on to South32 shares, in
part because he's still uncertain about what the company is
worth.
"Who knows what the valuation is?" he said at the shareholder
meeting in London.
While BHP has vowed its slimmer self will be more efficient and
profitable, the breakup will be costly. In March, the miner
estimated it would face pretax costs of $738 million to complete
the split, including about US$339 million of taxes.
But BHP forecast annual costs savings of around $100 million a
year from simplifying its portfolio through the demerger.
Earlier, Mr. Mackenzie told The Wall Street Journal the mining
giant remains committed to maintaining or increasing its dividend
despite concerns that the policy reduces its financial flexibility
at a time of weak metals prices.
Mr. Mackenzie's comments came after Standard & Poor's
Ratings Services earlier this week revised its outlook on BHP to
negative from stable, saying the miner's payout vow could weaken
its financial position given a broader downturn in commodity
prices.
"We are remaining committed with confidence to the progressive
dividend. At the moment, nothing needs to give," Mr. Mackenzie
said.
Scott Patterson in London contributed to this article.
Write to Rhiannon Hoyle at rhiannon.hoyle@wsj.com
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