Why bother making the Big Australian smaller? BHP Billiton shares rose on news the world's biggest miner is closer to demerging some unwanted assets. Yet, it is hard to see this move transforming either business. This will test whether companies can create sustainable shareholder value merely by putting assets into different packages for different investors.
The shares have outperformed most peers since April 1, when BHP first said it was looking at ways to prune its portfolio to focus on iron ore, copper, coal and petroleum. They rose by two per cent more on Friday, after BHP said its preference was to hive off aluminium, manganese and nickel into a separate unit. That would create a company which analysts estimate would be worth anything between $12 billion and $23 billion, against the parent's current market capitalisation of about $190 billion. Those metals accounted for just one per cent of operating profit last year.
One justification for pushing the shares higher would be the chance that the demerged assets might quickly succumb to a takeover at a premium. But that looks unlikely. Competitors might have been interested in parts, especially nickel, but the overall bundle is probably too diverse, even for a specialist deal-machine like Mick Davis' X2 Resources.
So, why reward BHP for going through the rigmarole of separating the companies, creating new legal and tax structures and a stock quote? As a new generation of austerity-minded chief executives like BHP's Andrew Mackenzie know, investors want focus and discipline from miners, after years of scattergun capital expenditure and ambitious dealmaking.
Some investors may crave exposure to core BHP and are put off by exposure to the orphan assets, or vice versa. That seems to be BHP's view. Maybe so. The alternative scenario is that hopeful sellers of the newly created stock struggle to find buyers.
