BHP Billiton Limited (ASX: BHP) is set to spin off some of its unloved assets into a new ASX-listed entity called South32 later in 2015, but what does history show about company share price performance following a demerger?
A recent analysis of spinoffs and demergers by broker Goldman Sachs found that: (based on a sample of 23 large demergers over the last 10 years)
- Both entities tend to outperform the ASX 100 index over the first 12 months.
- The parent company outperformed the ASX100 60% of the time by an average of 8%, while the spun-off company outperformed 80% of the time by an average of 20%!
- The spun-off company tends to outperform the parent over the first year. A good example of this can be seen in the performance of Orora Ltd (ASX: ORA) and Amcor Limited (ASX: AMC) since their split last year.
- The parent company tends to underperform in the second year by an average of 14%.
- Demergers have a tendency of improving the return on equity for the parent company. This could see BHP's profits rise faster than expected over the next couple of years.
- The spun-off company tends to have a higher a dividend yield and have perceived or actual lower growth prospects than the parent company.
- The long-term performance of both companies can be heavily influenced by acquisitions. Being a takeover target or aggressively acquiring complementary firms has proven to be a catalyst to share price growth.
Will South32 be a success?
South32 will be made up of BHP's Illawarra and South African coal mines as well as a number of aluminium, manganese, nickel, silver, lead and zinc operations. The final company will be valued around $US27 billion and indications are that the group will provide a solid dividend around 5% fully franked.
I think we'll see a significant amount of volatility in South32's share price over the first 12 months as investors get used to a company being less dominated by the iron ore price.
South32's exposure to a basket of commodities does not reduce the investment risk however, and investors need to recognise that the performance of South32 will be more a function of commodity prices than operational performance.
