In a stunning vote of confidence, BHP Billiton Limited's (ASX: BHP) shareholders have backed the mining giant's proposed demerger of South32 meaning that the spinoff will proceed.
More than 98% of investors who took part in the vote, spread between London and Perth, voted in favour of the spin-off which BHP Billiton believes will help unlock significant shareholder value.
While BHP Billiton will keep its core assets, South32 will be home to the group's unwanted assets and commodity groups such as aluminium, manganese, nickel, zinc and silver.
In light of the recent commodities crisis, management believe that the separation of the two entities will allow both parties to focus on their own growth trajectories and ultimately improve efficiencies and overall profitability. As it stands, the value that will be ascribed to the business is unclear, especially given the recent decline in the prices of various commodities.
At BHP's annual general meeting yesterday, the company said that: "South32 will have a strong balance sheet giving it the ability to pursue its own growth and investment opportunities," suggesting that the company may embark on a path of acquisitions.
As reported by the Fairfax press however, acquisitions don't appear to be South32's top priority whereby it would prefer to wait for better buying opportunities.
What this means for investors.
Aside from the resources they produce, one of the key differences between BHP Billiton and its spun-off entity will be their primary customer bases. As is the case with other large miners such as Rio Tinto Limited (ASX: RIO) and Fortescue Metals Group Limited (ASX: FMG), BHP Billiton relies heavily on Chinese demand to grow its earnings.
Unfortunately, China is slowing at a rapid clip which is a headwind these miners must contend with. South32, on the other hand, is expected to generate more of its earnings from Europe, while China will account for roughly 11% of the company's overall sales, according to Bloomberg.
That could make South32 a safer way for investors to gain exposure to Australia's resources sector without that dangerous reliance on China. Historically, spun-out entities have performed quite strongly against the market benchmark.
Given South32's ability to reduce costs and improve efficiencies considerably, it may be in investors' best interests to hold onto their new shares when they receive them. Investors will receive one South32 share for every BHP Billiton share held and the new entity will trade on the London, South African and Australian securities exchanges.
