September 29, 2015 / 10:17 AM / in 4 years

BHP Billiton's split may have lessons for Alcoa

SYDNEY (Reuters) - In what could be a cautionary tale for Alcoa Inc, global miner BHP Billiton’s decision to spin off non-core businesses into a separate company is yet to pay off for shareholders.

A promotional sign adorns a stage at a BHP Billiton function in central Sydney August 20, 2013. REUTERS/David Gray

Alcoa announced on Monday it will break itself in two, separating a faster growing plane and car parts business from traditional alumina and aluminum production as shareholders seek higher returns amid a commodity slump.

BHP used a similar rationale for ring-fencing select operations in Australia, southern Africa and South America into what became South 32 last May to concentrate on its most profitable commodities.

South32 shares fell to a record low on Tuesday of A$1.38, more than a third below its listing price. BHP stock, at A$21.61 at Australia’s Tuesday close, is the lowest in seven years.

“The argument is that these things create simpler structures where management can better focus on delivering value in the separate businesses,” said Andrew Driscoll, global head resources analysis for CLSA. “That’s true, but commodities prices are out of their control.”

Whoever ends up running the new Alcoa companies - initially Alcoa’s head Klaus Kleinfeld will serve as chairman and chief executive of the downstream component and chairman of upstream - may have fewer areas to focus on than their counterparts at South 32, whose businesses include aluminum, nickel, silver, manganese and coal.

With Alcoa’s split at least a year away, the firm has yet to disclose how much debt each entity will carry, a factor that helped investors decide whether they took up South 32 stock.

“BHP made sure South 32 wasn’t burdened with too much debt, a smart decision given the uncertainty surrounding the future of commodities markets,” said a mining analyst in Sydney not authorized to speak to media. “Kleinfeld will be aware of that.”

BHP used the sales pitch that the demerger would create shareholder value via simplification, similar to what Alcoa is seeking to achieve.

The BHP spin-off saw shareholders receive one South32 share for every BHP Billiton share they held. How Alcoa shareholders will fare once the split occurs is not yet known other than that the separation is intended to qualify as a tax­-free transaction to Alcoa shareholders for U.S. federal income tax purposes.

Alcoa’s breakup coincides with a global aluminum glut that has depressed prices by a quarter in 12 months, and 44 percent from their post-crisis highs.

Alcoa has been shutting underperforming smelters and cutting other costs while moving into more specialized and sturdier markets.

Last year, Alcoa bought Firth Rixson, a British jet-engine parts maker, for $2.9 billion. It also paid $1.5 billion for titanium manufacturer RTI International Metals, and absorbed a smaller German specialty supplier.

For its part, BHP was stripped back to its “four pillars” of growth: iron ore, copper, coal and petroleum after creating South 32.

Editing by Ed Davies

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