BHP spin-off South32 debuts at lower end of expectations

by Reuters 0

BHP Billiton’s spin-off South32 debuted near the bottom of expectations on Monday as investors awarded only a small premium to the new listing amid concerns about broad weakness in the resources sector.

Shares in the 11 billion Australian dollar ($8.81 billion) spin-off first traded at A$2.13 at 0215 GMT, at the lower end of the A$2.00 to A$3.00 range forecast by analysts for Australia’s biggest new listing in 15 years and the largest mining listing since Glencore Plc in 2011.

(READ MOREBHP Billiton names spin-off company ‘South32’)

However, the stock soon firmed slightly to A$2.18, in a weaker overall market, while BHP Billiton shares fell 7 percent.

Dealers and analysts had said there was strong interest in the shares at the lower end of the range.

“Looking at the total price of both BHP and South32 it’s pretty clear the market’s ascribed a small premium to the spinoff,” said CMC Markets chief strategist Michael McCarthy.

While some investors see the company as a potential takeover target, some analysts and fund managers say that is unlikely, given its size.

“They’re fairly large for most guys. There are not too many people who have that kind of cash,” said Rohan Walsh, a portfolio manager at Karara Capital.

Mick Davis, the ex-boss of Xstrata, previously made an offer for most of South32’s assets but was turned down.

His firm, X2, which has raised 5.6 billion US dollars in capital, may now be in a prime position to swoop if South32’s shares slide. But he would have to borrow around $10 billion to be able to snare South32, including a premium.

“That’s a big, risky bet,” said Walsh.

South32, named after the line of latitude joining its main assets in Australia and South Africa, fills a gap between the mega-miners and minnows, and offers a diverse suite of assets, from aluminium to silver.

Graham Kerr, South32’s chief executive, said in a statement: “We believe that our regional model will enable us to improve our productivity and performance in a sustainable way.”

The shares began trading at A$2.13, compared to the A$2.00 to A$3.00 range forecast by analysts, and ended its first day at A$2.09.

[DATA BIL:BHP Billiton] shares fell 7.3 percent, the biggest loser on the Australian share market, which was lower overall, with miners leading the drop due to a firm Australian dollar.

“There is appetite for that real good size, mid-tier, just below the BHP’s and Rio’s. For that reason it’ll attract interest,” said Matthew Keane, a resources analyst at Argonaut Securities in Perth.

South32 will also trade on the London market and Johannesburg Stock Exchange.

Trading could be volatile in the first few days as UK institutions who cannot hold the stock because it won’t be included in FTSE indexes may be forced to sell.

“London shareholders have been talking to Australian brokers about facilitating sales,” said one analyst, who puts South32’s worth at A$2.30 a share.