Rio Tinto’s dual listing belongs in history books

Jakob Stausholm risks fighting M&A battles with one hand tied behind his back. What’s shackling Rio Tinto’s RIO.AX, RIO.L boss is the company’s dual primary listings in London and Sydney.Just three months ago he defended the structure. Since then, though, an activist investor as well as rival BHP’s BHP.AX tilt at Anglo American AAL.L have exposed its shortcomings.

Rio is managed as one company. So in theory the dual listing, which stems from a 1995 merger, shouldn’t complicate matters much beyond some duplicated costs and governance issues like having two sets of annual meetings. And in practice that has often been the case. Not anymore.

First, the implied valuation gap the Australian listing enjoys over its UK counterpart approached 30% last month. That’s its highest point since 2013 excluding Covid-era abnormalities, per Barclays, whose analysts attribute it to European investors using Rio to express bearish views on its biggest customer, China. The premium is now just above 20%, equivalent to $25 billion in market worth.

That has brought Palliser Capital to the fray. The UK-based fund’s executives have been down a similar path before: investment chief James Smith used to work at Elliott Management, where he made the pitch in 2017 for BHP to ditch its dual listing. The latter’s CEO Mike Henry did so four years later.

Smith argued at last week’s Sohn Hong Kong Investment Leaders Conference that current London shareholders could get as much as a 44% uplift from a switch to a single listing in Sydney. That factors in Australia’s tax breaks on dividends known as franking credits – and the $8.7 billion and counting of them sitting unused on Rio’s books.

Palliser is overegging the potential boost, though. Rio’s implied $145 billion market worth Down Under values its enterprise at 6.1 times the next 12 months’ EBITDA, using LSEG data. That’s already higher than BHP’s multiple, even though the latter has a better EBITDA margin. Rio would probably also need a while to unlock unused franking credits.

Still, a single listing – and valuation -will make it much easier to use stock for dealmaking. Granted, Anglo American in its current form may not be on Stausholm’s wish list. But BHP’s attempt to buy it could set off a wave of industry consolidation, for which he’ll need as level a playing field as he can get.
Source: Reuters Breakingviews (Editing by Robyn Mak, Katrina Hamlin and Aditya Sriwatsav)