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Rio Tinto should abandon its primary listing in London and unify its corporate structure in Australia, following a move by rival BHP, according to an activist investor who has taken a stake in the dual-listed miner.
Palliser Capital, a British-based fund, said on Thursday that Rio’s current dual corporate structure was a barrier to its strategic plans, making it difficult to make major acquisitions and meaning the London-listed company was at a discount of 27 billion dollars traded on the market. Australian entity.
Merging the entities and consolidating the primary listing in Sydney, as rival BHP did two years ago, would see the FTSE 100 lose the world’s second-largest mining company.
The fund, which presented its views at the Sohn Hong Kong investment conference on Thursday, is launching its campaign amid intensifying consolidation in the mining sector after London-listed Anglo American on Wednesday extended its talks with BHP over a blockbuster takeover bid.
Palliser argues that Rio’s dual-listing structure prevents it from acquiring all the shares due to the company’s valuation gap and complex corporate governance. Investors are also against using cash to make big deals because of the significant financing involved.
“What we believe is the root cause of the undervaluation is an extremely clunky and outdated corporate structure involving two publicly traded companies,” Palliser Chief Investment Officer James Smith said in the presentation, adding that he believed there was an upside from “ almost 40 percent”. [in Rio’s shares].
Palliser’s position – less than 1 percent of Rio’s shares – is the fund’s largest and is worth several hundred million pounds, according to people familiar with the matter.
The fund first started investing in Rio more than a year ago and had been in contact with management about the dual listing, the people said.
In a statement to the Financial Times, Smith added: “We support Rio Tinto and its portfolio of diversified, world-class mining assets” but said the group’s “significant” growth potential was “hindered by a complex and outdated [dual listing] structure”.
Rio said in a statement on Thursday that it regularly looks at a range of corporate and strategic topics that can optimize shareholder value and deliver results for other stakeholders, and that it has a “policy of open dialogue with all shareholders around these topics.”
Research analysts at Barclays noted in a report in early April that the gap between Rio’s Australian and British shares had reached the widest since 2013, at 26.5 percent.
The collapse of the dual-listing structure “appears to us to be a low probability event,” Barclays analysts wrote. “However, we do not see insurmountable technical barriers to unification; there would be some benefits.”
Smith, the founder of Palliser, was previously head of Elliott Management’s Hong Kong office, where he led a similarly successful campaign targeting BHP about seven years ago.
BHP announced it would leave the FTSE 100 in 2021, although it will retain a secondary listing in London. Other companies have also given up their dual listings in recent years, including Shell.
At an industry conference in Miami this month, BHP chief executive Mike Henry said the move had lifted the discount on its shares and made it “more practical” to pursue full share takeover deals such as the Anglo approach.
However, Rio’s chief executive Jakob Stausholm has previously played down the possibility of giving up its primary listing in London.
“On my list of CEO agenda items there are always a number of things that I cannot meet. And the [dual-listed company] is the smallest problem in my opinion,” he told analysts in February. “We are pleased to be a global company.”
In his presentation, Palliser also argued that a move from Rio to Australia would provide billions of dollars in tax benefits for Australian investors to qualify for, with minimal costs associated with the move.
About 77 percent of Rio’s share capital is held by investors in the British company, unlike BHP, which was more heavily weighted towards the Australian entity.
But according to Palliser’s presentation, the vast majority of Rio’s revenue is generated by the Australian entity. “This is an Australian company,” Smith said.
Rio’s shares would still trade in London via a secondary listing at Palliser’s proposal. But the pressure comes at a difficult time for the UK stock market, which has been hit by a number of companies moving their listings abroad to close a valuation gap with rivals.
Shares in Rio have been broadly stable so far this year, reaching a debt-inclusive valuation of more than £100 billion.
Additional reporting by William Sandlund in Hong Kong