Incitec Pivot Ltd. (IPL), Southbank, Victoria, has revived its plan to separate its Incitec Pivot Fertilisers and Dyno Nobel businesses to create two separate companies, on May 23 announcing plans to demerge its fertilizer and mining explosives divisions into two separately Australian Securities Exchange (ASX) listed companies by mid-2023.
IPL said the decision to pursue a structural separation of the company is the result of a comprehensive review, “with robust underlying market conditions supporting each business to move forward with appropriately strong balance sheets.”
IPL said its rationale to separate the businesses includes the significant growth potential for both businesses by accelerating the company’s core technology offering to two different essential industries. It said, among other factors, that the two businesses have minimal overlap today, and there is declining synergy in sharing an ammonia manufacturing core, as its explosives and fertilizer customers require specialized and differing solutions.
The proposed separation of Incitec Pivot Fertilisers and Dyno Nobel is expected to be implemented via a court-approved scheme of arrangement, subject to relevant approvals. Under the proposal, IPL will become Dyno Nobel Ltd. and the Incitec Pivot Fertilisers business will be demerged under a standalone entity, Incitec Pivot Fertilisers Ltd., which will seek listing on ASX.
IPL said preparatory separation and cost analysis has been concluded, with the transaction now moving into the execution phase. The company is targeting “a practical separation” of the two businesses late in the 2022 calendar year, ahead of the shareholder vote in the first quarter of 2023 and formal separation shortly after, subject to required approvals and consents.
If the separation by way of demerger is approved and implemented, IPL shareholders will receive shares in Incitec Pivot Fertilisers Ltd. in proportion to their existing shareholding in IPL, and will also retain their existing IPL shares, which will be rebranded Dyno Nobel Ltd.
Based on preliminary estimates and analysis undertaken to date, the company expects one-off costs to be A$80-$105 million (approximately US$56.7-$74.4 million at current exchange rates), and ongoing costs to be approximately A$25-$35 million a year.
It expects the largest proportion of the one-off costs to be tax (predominately stamp duty), transition support and advisory costs, while the major ongoing costs are expected to include establishing core corporate and support functions in Incitec Pivot Fertilisers. The ongoing costs will be allocated between the two separated businesses.
The asset perimeter is expected to be largely as per current reported segments, and the future business options are expected to be determined by the time of the company’s Investor Day scheduled for later this year – possibly in late August/early September – when a further detail on strategy and growth will be provided as well as a transaction update.
“There is a clear and compelling logic for our Dyno Nobel and Incitec Pivot Fertilisers to thrive as two independent companies,” said IPL Chairman Brian Kruger.
“Both have market-leading positions in very attractive industries, supported by global mega trends, with clear opportunities for growth through leveraging technology,” he told analysts at a company earnings call on May 23.
“We believe that creating two market leading companies that are well capitalized, with strong technology, clear strategies for growth and listening to our customers will unlock significant value for our shareholders,” said IPL Managing Director and CEO Jeanne Johns.
Regarding the risks related to the volatility and seasonality of the Fertilisers business in the demerger, Johns told analysts that IPL has invested in the resilience of the business over the last two years, including in terms of manufacturing reliability. She pointed to the ongoing Phosphate Hill turnaround, which, she said, is the largest of its kind and setting up for a solid reliable run.
She also has “every expectation” that the Glencore Mount Isa copper smelter, which is integral to IPL’s Phosphate Hill operations as a supplier of sulfur as a byproduct to IPL’s Mt. Isa sulfuric acid plant, will continue to be operated into the future (GM Sept. 25, 2020).
Johns also pointed to the company’s investment in Australia Bio Fert, and the urea offtake arrangement with the potential Perdaman project (GM Dec. 17, 2021; May 7, 2021).
Investors, however, gave the proposal a cool reception, sending IPL’s shares sliding almost 4% immediately following the announcement, despite the company reporting record half-year profits (see Separate Earnings Story).
IPL’s decision to split its two businesses comes some 20 months after the company first undertook a strategic review of its fertilizer business, and was considering three possible outcomes – sale, demerger, or retain and invest (GM Sept. 6, 2019). In early 2022, it concluded to retain the business “as the best outcome for shareholders,” citing “the extraordinary market uncertainty and travel restrictions caused by the COVID-19 pandemic” (GM April 24, 2020).
The IPL Chairman told analysts at a company earnings call on May 23 that “the decision was the right one at that time.”
While IPL has been buoyed by an upturn in commodities that has fuelled demand for fertilizer and explosives, shares in the company have remained well off record highs achieved in 2008, The Australian Review reported, after this week’s spin-off plan was announced as IPL seeks to lift its appeal.
Ratings service S&P believes IPL has sufficient balance sheet flexibility at the “BBB” rating level to accommodate the proposed demerger of its fertilizer business, Bloomberg reported, citing a statement by the rating company.
IPL remains committed to maintaining its credit quality and has the track record, business strength, and balance sheet capacity to manage the demerger within the constraints of the rating, S&P said.
S&P considers the likelihood of a rating change arising from the demerger as “low.” As cited by the Bloomberg report, the rating company said although the fertilizers business is inherently more volatile than the explosives unit, the proposed demerger will likely lessen the company’s scale of operations and earnings diversity.
Rating stability will likely be reliant on the adoption of more conservative financial policy, S&P said. It sees IPL’s leverage improving further during the second half of FY22 on sustained growth and expected trade working capital unwind.
IPL ASX listed businesses
| Dyno Nobel | Incitec Pivot Fertilisers | |
| Owners: IPL shareholders | 100% | 100% |
| Entities | (ASX listed) Existing listed group holds Explosives business Dyno Nobel | (ASX listed) New standalone listed company comprising Fertilisers business: Incitec Pivot Fertilisers |
| Key businesses | Dyno Nobel Americas Dyno Nobel Asia Pacific Titanobel | Australian Bio Fertilisers Distribution Manufacturing |
| Key assets | WALA (Waggaman), Louisiana Moranbah, Queensland Cheyenne, Wyoming St Helens, Oregon LOMO, Louisiana, Missouri Global Initiating Systems (IS) platform | Phosphate Hill, Queensland Gibson Island, Queensland Geelong, Victoria Extensive distribution network |
Key business metrics1
| Incitec Pivot Ltd. | Dyno Nobel | Incitec Pivot Fertilisers | |
| LTM Revenue (A$m)2 | 5,244 | 3,015 | 2,229 |
| LTM EBIT (A$m)2,3 | 1,065 | 559 | 505 |
| No of employees | Over 5,000 | Over 4,400 | Over 700 |
| LTM revenue split | Incitec Pivot Fertilisers 57% Dyno Nobel 43% | Dyno Nobel Americas 67% Dyno Nobel Asia Pacific 33% | Distribution 58% Manufacturing 42% |
1 Results for the six months ending Sep. 30, 2021, and six months ended March 31, 2022
2 Does not include corporate costs and eliminations
3 Does not include any adjustments for incremental ongoing standalone costs