Shares in Australia’s biggest company, BHP Billiton, have risen sharply this afternoon after the resources giant confirmed that a demerger is its preferred way of simplifying its global portfolio.
Reports suggest the demerged business could be valued at $US14 billion.
While no decision has been made to push ahead with a demerger, BHP published a statement to the Australian Securities Exchange confirming a demerger was the preferred way to divest from non-core businesses.
Any demerged entity is likely to include aluminium assets at the very least. Other prime candidates for the demerged entity include manganese and possibly nickel operations.
Those three divisions have numerous assets located within Australia, particularly nickel which has a cluster of mines, a refinery and a smelter located in Western Australia.
There has been speculation some of BHP’s thermal coal assets could be included too, particularly the ones in South Africa.
The Australian Financial Reviewhas reported that the demerged business would be worth approximately $US14 billionand would have its headquarters in Perth.
Perth already hosts the largest number of BHP employees in one building.
In a statement to the ASX, BHP said a company containing just iron ore, coal, petroleum and copper was sufficiently diversified and could generate “stronger growth in cash flow”.
As it has said many times before, BHP said potash remained a possible fifth pillar of the business.
The miner said it had considered many options, but it ultimately preferred bundling its laggard commodities into the single demerged entity.
”The board has continued to study various structural alternatives including at its meeting this week. A demerger of a selection of assets is our preferred option,” the statement says.
“The board expects to consider this, and other matters, when it reconvenes next week. If any material decisions are made they will be announced immediately.”
BHP shares have leapt from $38.35 to $39.09 since the statement was published. The stock was 93 cents higher than Thursday’s closing price shortly before 3pm.
If allowed to focus solely on its most important businesses, BHP said it would be able to “more quickly improve the productivity and performance of our largest businesses”.
The preference for a demerger comes after 25 months of asset sales, during which BHP raked in proceeds of $US6.5 billion.
Many of the assets to be included in a demerger simply could not be sold.
Most of the poorly performing assets came to the company via the merger with Billiton, a fact that emboldened rumours the demerger is effectively an undoing of what happened in 2001.
Operating around the constraints of the dual-listed structure has been a key challenge over the months of deliberation.
Aluminium, manganese and nickel collectively contributed just $US915 million of the $US28.4 billion of EBITDA the company reported for the 12 months to June 30, 2013.
Speaking prior to today’s announcement, Deutsche analyst Paul Young said investors had been more focused on share buybacks in recent months than the prospect of a demerger.
‘‘If they decide to go along the demerger path that will be a step in the right direction, but it may actually not be material to BHP given the value of the assets being talked about’’ he said.
Pengana Capital fund manager Tim Schroeders said the demerger was a worthy exercise, but he said the divestment of a collection of struggling assets won’t do much to ensure the company’s long-term primacy as the China boom evolves away from steel production.
‘‘You still have three divisions contributing circa 90 per cent of the earnings and the commodities for those three divisions have been falling,’’ he said, in reference to iron ore, petroleum and copper.
‘‘It is unclear how are they going to reposition the business for longevity from here on. The spin-out is part of that but it is more of a short-term filip than a long-term strategic decision.”
‘‘It gets you part the way toward the repositioning without truly being transformational.’’
BHP is scheduled to publish its full year financial results on Tuesday.