After a year of campaigning, activist investor Palliser Capital, which holds around $300 million in Rio Tinto (ASX: RIO) shares has forced the world’s second largest miner to put to a shareholder vote the unification of its corporate structure into a single Australian-domiciled company.
After enlisting Grant Thornton Australia to review the benefits of unification, the UK-based hedge fund argues that the current dual-listed structure – with 371.2 million shares on the ASX and 1.25 billion shares on the London Stock Exchange - has cost investors $50 billion in value.
The company also trades on the NYSE using American Depositary Receipts (ADR) with each ADR corresponding to one ordinary London share.
The current 18% discount of Rio’s London-listed shares to its Australian stock, due to different tax treatment of dividends has encouraged Palliser, which owns Rio’s cheaper London stock, to push for Rio’s ASX-listed company to acquire its British counterpart and create a single unified parent group.
The report's findings
Findings of the Grant Thornton report suggest that the advantages of collapsing Rio Tinto’s dual-listed structure outweighed the disadvantages for both Rio’s British and Australian shareholders, which included the one-off unification cost of US$450 million ($715 million).
The miner’s annual tax would also increase by US$145 million.
The US$145 million tax increase is significantly lower than a previous estimate by Rio in “the mid-single-digit billions of US dollars”. The miner has called unification “value destructive”, the report states.
The report also suggests “the significant strategic flexibility that unification would bring to Rio Tinto – particularly at a time of rising capital intensity for new mine development and increasing consolidation in the industry”.
Unification would allow shareholders to benefit more from Australian franking credits, the report also added.
The Grant Thornton report also found that the ASX boasts a significantly larger presence in the mining sector compared to its London counterpart.
While the 700 Australian-listed metals and mining companies had an aggregate market capitalisation of US$300 billion, the LSE lists 48 metals and mining companies - accounting for around 5.5% of the total companies listed on the LSE - with an aggregate market cap of around US$205 billion.”
ASX-listed metals and mining companies have raised $US28 billion since 2020, compared with $US830 million in London, the report said.
Overwhelming commercial logic
Meanwhile, Palliser founder James Smith notes the "overwhelming commercial logic” for doing so has resulted in a dozen other companies had unified their dual-company structures, including mining rival BHP (ASX: BHP).
Having conducted a review of its own, Rio concluded last year that its dual-listed company (DLC) structure – which it has operated under since Rio Tinto has operated under since December 1995 - continues to offer benefits to both the company and its shareholders.
The miner’s board has urged shareholders to reject Palliser’s resolution and claims that unification will cut the value of its Australian-listed shares to the “weighted average” of its ASX and London-listed shares.
Shareholders will now vote on the resolution based on the findings of the Grant Thornton appraisal on 3 April for UK-listed shares and 1 May for Australian-listed shares.
