COLUMN-BHP Billiton demerger shows how good a deal Billiton got – by Clyde Russell (Reuters U.K. – August 18, 2014)

Clyde Russell is a Reuters columnist. The views expressed are his own.

LAUNCESTON, Australia, Aug 18 (Reuters) – BHP Billiton’s plan to demerge its unwanted aluminium, nickel and manganese assets underscores just what a fantastic deal shareholders in the old Billiton got when the two joined in 2001.

When Australia-based BHP joined forces with the London-listed, but largely South African, Billiton, a diversified natural resources giant was created.

At the time it was largely viewed as a deal that favoured Billiton shareholders. BHP shareholders got about 58 percent of the merged entity, while Billiton’s got 42 percent, meaning that BHP paid about a 20 percent premium to Billiton shareholders, according to a March 19, 2001 report in the Wall Street Journal.

With the Aug. 15 news that BHP Billiton’s board favours a demerger, the 2001 deal comes full circle. While it’s unlikely to be an exact match, the bulk of assets proposed for the new spin-off company will be those that Billiton brought into the 2001 merger.

Billiton’s main assets in the 2001 merger were the Hillside and Bayside aluminium smelters in Richards Bay on South Africa’s east coast, the Mozal smelter in neighbouring Mozambique, and energy coal mines in South Africa.

Other assets of the merged BHP Billiton that may be spun-off include a manganese mine in the north of Australia, the ore for which is smelted at a plant in Tasmania, a manganese mine in South Africa, a ferronickel mine in Colombia, an integrated nickel mine and smelter in Western Australia, and a bauxite mine and alumina plant, also in Western Australia.

It’s also possible that Billiton’s energy coal assets in South Africa, as well as the old BHP energy coal mines in Australia’s New South Wales, will be included in the demerged entity, which reports have suggested will have a value of around $14 billion.

This will leave BHP Billiton with its four core pillars, namely iron ore, coking coal, copper and petroleum, with a potential fifth in Canadian potash assets.

Iron ore, copper and coking coal are heavily exposed to the China growth story, and to some extent so is the oil and gas business, given much of the growth in demand is expected to come from China and the rest of Asia.

The four core businesses generate margins of more than 10 percent above the group’s overall margins, meaning, as The Australian newspaper’s columnist Stephen Bartholomeusz noted, the others generate “significantly more than 10 percentage points below the average”.

The demerger will allow BHP to focus on its most profitable businesses, which is what it already has been doing, given the efforts to expand iron ore output, while controlling costs at the other major divisions.

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