Our largest iron ore miner may be taking the same path as BHP Group Ltd (ASX: BHP) and Wesfarmers Ltd (ASX: WES) as reports emerge that Rio Tinto Limited Fully Paid Ord. Shrs (ASX: RIO) is contemplating a spin-off of one of its divisions.
The Rio Tinto share price surged 1.1% to $78.10 in early trade but that pales to the 1.5% increase in the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index.
Shareholders will be hoping that the spin-off, if it eventuates, will give Rio Tinto's share price a boost as what happened to the BHP share price and South32 Ltd (ASX: S32) share price.
Rio Tinto's spin-off
Rio Tinto is reportedly going to take its Iron Ore Company of Canada (IOC) business public in the first half of 2019, according to Reuters.
The miner had been hoping to sell the business outright but it's believed it hasn't received an acceptable offer for the assets.
Its "Plan B" is to dual-list the division on the New York Stock Exchange and the Toronto Stock Exchange for around US$4 billion ($5.7 billion) through an initial public offer (IPO) – but that's subject to market conditions recovering from the recent melt-down on global markets.
Rio Tinto refused to comment on the article but if this comes to pass, ASX shareholders shouldn't expect to receive any shares in the newly listed entity like they did in South32 or Coles Group Ltd (ASX: COL) when Wesfarmers divested its supermarket business.
IPO vs in-specie
Those were "in-specie" distributions and not an IPO. An in-specie spin-off means existing shareholders in the parent company are entitled to shares in the new "child" company. Shares in the child are not sold to investors and the value of the spin-off is often deducted from the value of the parent's shares.
An IPO is the sale of new shares in the child entity where the parent will receive cash from investors who apply for shares in the new business.
The decision to do an in-specie spin-off or an IPO can be driven by a few considerations, such as tax liabilities and the make-up of the current share register.
Should investors be excited?
In Rio Tinto's case, an IPO is probably the only acceptable way to monetise its 58.7% stake in IOC, which reported revenues of US$1.9 billion in 2017.
Many of Rio Tinto's ASX shareholders won't want to (or can't) hold overseas shares and that makes the IPO path a logical one.
Getting the proceeds from the IOC IPO will also excite the market as that will likely mean more capital returns from Rio Tinto in 2019.
There's already growing speculation that the miner will announce some form of return for shareholders in the upcoming February reporting season (click here to find out more).
Rio Tinto and its stablemate BHP are the stocks that keep on giving – and that's the type of shares that will likely outperform in a volatile and uncertain market.
