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Rio Tinto should abandon its primary London listing and unify its corporate structure in Australia, echoing a move by rival BHP, according to an activist investor that has taken a stake in the dual-listed miner.
Palliser Capital, a UK-based fund, said on Thursday that Rio’s current dual corporate structure was a barrier to its strategic plans, which made it difficult to do major acquisitions and meant the London-listed company was trading at a $27bn discount to its Australian entity.
Unifying the entities and consolidating the primary listing in Sydney, as rival BHP did two years ago, would result in the FTSE 100 losing the world’s second-largest mining company.
The fund, which presented its position 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-listed structure prevents it from pursuing all-stock takeovers because of the company’s valuation gap and complex corporate governance. Investors are also against using cash to do large deals because of the significant financing involved.
“What we think is the root cause of the undervaluation is an extremely clunky and outdated dual-listed corporate structure,” said Palliser’s chief investment officer James Smith in the presentation, adding he believed there was upside of “nearly 40 per cent” [in Rio’s shares].
Palliser’s position — less than 1 per cent of Rio’s shares — is the fund’s largest and worth a few hundred million pounds, according to people familiar with the matter.
The fund first began investing in Rio more than a year ago and had been in contact with management about its dual listing, the people said.
In a statement to the Financial Times, Smith added: “We are supportive of Rio Tinto and its world-class portfolio of diversified mining assets,” but said the group’s “significant” growth potential was “hindered by a complex and outdated [dual listing] structure”.
Rio did not immediately respond to a request for comment.
Research analysts at Barclays noted in an early April report that the gap between Rio’s Australian and UK stock had reached its widest since 2013, at 26.5 per cent.
Collapsing the dual-listed structure “appears a low probability event to us”, the Barclays analysts wrote. “However, we don’t see any insurmountable technical barriers to unification, there would be a number of benefits.”
Smith, Palliser’s founder, was previously head of Elliott Management’s Hong Kong office, where he oversaw a similar successful campaign around seven years ago focused on BHP.
BHP announced it was leaving leaving the FTSE 100 in 2021, though it retains a secondary London listing. Other companies in recent years have also abandoned dual listings including Shell.
At an industry conference in Miami this month, BHP chief executive Mike Henry said that the move had removed the discount on its shares and made it “more practical” to pursue all-stock takeover deals, like its Anglo approach.
However, Rio’s chief executive Jakob Stausholm has previously played down the possibility of abandoning its primary listing in London.
“On my list of CEO agenda items, there’s always a number of things I can’t hit. And the [dual-listed company] is the smallest issue to my mind,” he told analysts in February. “It serves us well to be a global business.”
In its presentation, Palliser also argued that a move from Rio to Australia would unlock billions of dollars in tax credits that Australian investors are eligible for, and with minimal costs associated with the move.
About 77 per cent of Rio’s share capital is held by investors in its UK company, in contrast to BHP, which was more heavily weighted towards the Australian entity.
But the vast majority of Rio’s earnings are generated by its Australian entity, according to Palliser’s presentation. “This is an Australian business,” Smith said.
Rio shares would still be traded in London under Palliser’s proposal, through a secondary listing. But the push comes at a difficult time for the UK stock market, which has been hit with a number of companies shifting their listings abroad to close a valuation gap with competitors.
Shares in Rio are roughly flat in the year to date, giving it a valuation including debt topping £100bn.
Additional reporting by William Sandlund in Hong Kong
https://www.ft.com/content/1deb8565-faab-469d-a8e7-81021fed00d0
