When BHP Billiton (LSE: BLT) (NYSE: BHP.US) was created through the mega-merger of BHP and Billiton back during 2001, much of the industry celebrated. The deal was a landmark for the mining industry, creating the world’s largest mining company, both in terms of size and output.
However, now after more than a decade together, BHP is considering a break-up, as the company’s management looks to increase shareholder returns by divesting non-core assets.
Wealth creation
BHP’s merger with Billiton has actually been a resounding success despite the plans to split. Since the merger, BHP’s market value has surged to $180bn, or £106bn compared with a pro-forma market capitalisation of just $28bn at the time of the merger.
The Billiton side of the business, for its part, has been a major contributor to this creation of wealth. Indeed, according to BHP’s management, the merger has helped add “substantial shareholder value”, allowing BHP’s shares to outperform virtually all other large companies over the past decade with a total shareholder return of 400%.
A natural split
Nevertheless, the two sides of the business have grown apart during the past few years and the former Billiton assets have become marginal to the Anglo-Australian group. Billiton assets include African manganese mines, aluminium production facilities and the Nickel West business.
These businesses used to be core to BHP’s operations. However, now the company is concentrating on its ‘four pillars’ of production; coal, copper, iron ore and petroleum.
A great example of how much BHP’s business has changed since the merger can be seen in the company’s results. For example, back during 2001, iron ore and aluminium were key to the company’s future. The two commodities provided 11% each to group earnings before interest and tax.
Now, iron ore generates more than half of BHP earnings, while aluminium has been loss-making for the past two years.
As a percentage of earnings, BHP’s aluminium, manganese and nickel operations only contributed 1.2% of group earnings, before interest and tax for the half year ended 31 December, on revenues of $4.2bn.
Looking to sell
So, it makes sense for BHP to offload these assets, indeed, they are no longer essential to the company and returns are minimal.
Management is looking to dispose of these assets in a way that will maximise value for BHP’s shareholders. BHP is seeking a sale, although if BHP can’t find a buyer it is likely that the company will spin off the assets into a new company; potentially reviving the independent Billiton name.
X2 Resources, the vehicle founded by Mick Davis, the ex CEO of mining giant Xstrata, is expected to take look at BHP’s portfolio. Mick Davis is well respected in the City as he built a reputation on buying struggling, unwanted mining assets and turning them around. X2 has already secured $2.5bn of financing from private equity backers and the City.
Unfortunately, BHP’s unwanted assets are expected to be worth around $10bn in total, which puts the whole package out of reach for X2. Still, there are likely to be plenty of parties interested in the assets.
If a deal goes ahead then BHP will be flush with cash, and management has hinted that this cash could be returned to investors.
