BHP Billiton's back to basics is good example for Kiwi firms

By Peter V O'Brien

Friday 12th July 2002

The Australian Stock Exchange gets a new company on Monday while its New Zealand counterpart frets about the size of the local market and endeavours to boost the number of listings.

BHP Billiton's spinoff, BHP Steel, will start trading on July 15 and should be high on the Australian market capitalisation from day one.

Given the 6% of share capital put into a "sale facility" was 54 million shares, it followed that the new company should have 900 million shares on issue.

BHP Billiton's statement detailing the demerger proposal was dated May 13 and said the company had determined an indicative price range of $A2.60-3.30 for shares sold under the sale facility.

That was before the recent improvement in the international steel market and solid increases in the price of hot-rolled coil steel, that product being an important element in BHP Steel's forecast of earnings before interest and tax (ebit).

The company's forecasts of profitability were considered in The National Business Review on May 3.

It was noted the company expected ebit of $A167 million for the year ended June 2002, a decline of 45.2% on the previous year. The figure was forecast to rise to $A343 million in 2003, leading to "profit attributable to shareholders" of $A254 million.

Net profit of $A254 million would result in earnings a share of 28.22Ac a share, assuming capital of 900 million shares.

The mid-point of the "final price" range would be $A2.95, giving a projected price/ earnings multiple of 10.45 for 2003.

A $A2.95 price could be low in light of the improvement in steel prices and a reported reluctance of BHP Steel shareholders to sell into the sale facility.

Assuming BHP Steel came on at or near $A2.95, say $A3, the company's initial market capitalisation would be $A2.7 billion (NZ3.1 billion at last Friday's 5pm closing exchange rate).

A capitalisation of $NZ3.1 billion would put BHP Steel second only to Telecom if the Australian steel group was a New Zealand-domiciled company.

The May 13 news release quoted BHP Billiton chairman Don Argus as saying there was recognition that the listing of BHP Steel would maximise the future prospects of that business by creating a standalone company focused on maintaining and enhancing its strong market reputation.

"BHP Steel will be able to pursue and capture market opportunities and ensure its long-term competitiveness in a way that would not have been possible if it had remained part of BHP Billiton. That has proved true of our former long-steel products business, now OneSteel, which shortly after being spun out from BHP went on to participate in a major industry consolidation transaction."

Mr Argus said the demerger aimed to maximise the combined value of BHP Steel and the BHP Billiton Group.

"Importantly, the process provides eligible BHP Billiton shareholders with the opportunity to retain their BHP Steel shares, to acquire additional shares prior to the public listing of BHP Steel or to sell part or all of their entitlement into a dedicated sale facility."

It is fair to say Mr Argus and his director and executive colleagues were anxious to see a successful spinoff of the steel operations and therefore could be forgiven an element of perhaps florid language.

They may have become more relaxed since May 13. BHP Steel should come on at a reasonable price, provided international sharemarkets are not subject to a renewal of wobbles that affected them in recent weeks.

Possible apprehension would be understandable. It is unusual for an effective one-product company (although the group has more than one form of steel) to list these days.

Most big companies have diversified activities - even banks and the demutualised insurance companies, which are now described as marketers of financial products and services.

BHP Billiton went the other way, after close examination of what it was about. The old BHP was known as the "big Aussie" before its merger with UK-based Billiton.

Big companies become bureaucratic and complacently tired. BHP decided to reorganise itself some years ago, getting rid of peripheral activities tacked on to its core business over time.

Going back to basics requires changes to corporate culture and inevitable pain.

Some New Zealand companies have been through the process and others should tackle it.

There will, or should, be considerable interest among New Zealand investors on Monday when BHP Steel makes the Australian boards - or screens to acknowledge modern developments.

Local institutions include BHP Billiton and therefore BHP Steel in their portfolios. Individual New Zealanders have stakes in the Australian companies.

They will know their fate on Monday.

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