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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 acquired a stake in the mining group, which is also listed on the London Stock Exchange.
UK-based fund Palliser Capital said on Thursday that Rio de Janeiro’s current dual corporate structure was an obstacle to the company’s strategic plans, making major acquisitions difficult and meaning the London-listed company trades at a $27 billion discount to its Australian subsidiary.
A merger of the companies and a consolidation of the main listing in Sydney, as rival BHP did two years ago, would result in the FTSE 100 losing the second-largest mining company in the world.
The fund, which unveiled its position at the Sohn investment conference in Hong Kong on Thursday, launches its campaign against a backdrop of deepening consolidation in the mining sector after London-listed Anglo American on Wednesday expanded its talks with BHP over a large-scale takeover offer.
Palliser argues that Rio’s dual listing prevents it from pursuing all-equity takeovers because the company has a valuation gap and complex corporate governance. Investors also oppose large transactions in cash because of the significant financing costs involved.
“We believe the root cause of the undervaluation is an extremely cumbersome and outdated dual-listing structure,” said James Smith, Palliser’s chief investment officer, in the presentation, adding that he sees upside potential of “almost 40 percent.” [in Rio’s shares].
Palliser’s position – less than 1 percent of Rio’s shares – is the fund’s largest and worth several hundred million pounds, people familiar with the matter say.
The fund first invested in Rio over 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 world-class portfolio of diversified mining assets,” but said the group’s “significant” growth potential was “limited by a complex and outdated [dual listing] Structure”.
Rio said in a statement on Thursday that it regularly addresses a range of corporate and strategic issues that could optimize shareholder value and benefit other stakeholders and that it has a “policy of open dialogue with all shareholders on these issues.”
Barclays research analysts noted in a report in early April that the gap between Rio’s Australian and British shares had reached its largest level since 2013, at 26.5 percent.
A collapse of the dual exchange structure “seems to us to be an unlikely event,” wrote the Barclays analysts. “However, we do not see any insurmountable technical obstacles to unification; there would be a number of advantages.”
Smith, Palliser’s founder, previously headed Elliott Management’s Hong Kong office, where he oversaw a similarly successful campaign focused on BHP about seven years ago.
BHP announced that it will leave the FTSE 100 in 2021, but will continue to have a secondary listing in London. Other companies have also abandoned their secondary listings in recent years, including Shell.
At an industry conference in Miami this month, BHP Chief Executive Mike Henry said the move eliminated the share discount and made share-based acquisitions, such as those BHP is pursuing following the example of Anglo, “more practical.”
However, Rio’s CEO Jakob Stausholm had previously played down the possibility of abandoning the primary listing in London.
“There are always a number of things on my CEO agenda that I cannot address. And the [dual-listed company] is, in my opinion, the smallest of the problems,” he told analysts in February. “It’s good for us to be a global company.”
In his presentation, Palliser also argued that a move from Rio to Australia would unlock billions of dollars in tax breaks to which Australian investors would be entitled, and that the costs associated with the move would be minimal.
Around 77 percent of Rio’s share capital is held by investors in the British company. At BHP, however, the capital was invested primarily in the Australian subsidiary.
But the majority of Rio’s revenues come from its Australian office, according to Palliser’s presentation. “This is an Australian company,” Smith said.
Under Palliser’s proposal, Rio’s shares would continue to trade in London, through a secondary listing. But the move comes at a difficult time for the UK stock market, which is suffering from the shift of many companies’ listings overseas to close a valuation gap with competitors.
Rio’s shares have remained more or less unchanged so far this year, giving the company a valuation of over £100 billion including debt.
Additional reporting by William Sandlund in Hong Kong