UK Edition
The firms that find it hard to be in two places at once
There are few things more likely to make a boss more hot under the collar than the news Elliott Management has built up a significant stake in their business.
The US activist investor is notorious for throwing its weight around, demanding that boards sell off parts of their company, return more cash to shareholders or – in the case of Alliance Trust – oust their chief executive.
Its latest demand of FTSE 100 mining giant BHP Billiton, in which it holds a 5.4pc stake, is a little less conventional: the scrapping of its Anglo-Australian dual-listed company (DLC) “Siamese twin” structure.
At present, BHP is technically two companies: BHP Ltd, headquartered in Melbourne, and BHP Billiton Plc, based in London. While they have two distinct sets of shareholders, the companies are led by a single board and work together seamlessly, with one set of financial figures and equal voting rights and dividends for all shareholders. Elliott claims that getting rid of this “obsolete” structure would create a hefty US$22bn (£15.8bn) of value for shareholders. But while BHP’s board says it is continually reviewing the merits of being a DLC, for now it thinks the risks of a break up are too high.
The row has shone light on the unusual structure, which is falling out of favour as increasingly globally minded shareholders demand more clarity and efficiency from the companies they invest in. Being listed on more than one market is not unusual for multinational companies, but those with a full DLC structure are much less common. They are set to become rarer still as two Anglo-Dutch firms, the consumer goods giant Unilever and information and analytics provider Relx unify their structures in the coming months.
Unilever is reportedly in the process of ironing out the details of its change, including where it will locate its headquarters, while Relx has announced that it will fold Netherlands-based Relx NV into Britain’s Relx Plc. That will leave just five DLCs: BHP and its fellow Anglo-Australian miner Rio Tinto, investment bank Investec and paper and packaging maker Mondi, both of which are split between the UK and South Africa, as well as cruise ship operator Carnival, headquartered in both Miami and Southampton.
In almost every case the unusual structure is the result of an international merger – Investec is the only current exception, having created a London-listed arm in 2002 to access UK investors.
Having a headquarters in both markets can assuage political worries, suggests Neil Shah, of equities research firm Edison. “When two companies get together the decision about where the HQ is going to be, where the job losses are going to be, are sometime avoided by creating these dual structures,” he says.
In theory it also allows the combined firm to tap two pools of investors for cash. It can also create tax advantages for shareholders. BHP’s Australian shares tend to be higher as its investors there can avoid paying double tax on their dividends through the use of so-called franking credits.
But it is now 10 years since a new DLC was created, as the concentration of capital in a smaller number of international investment funds has weakened the rationale behind them. Rather than helping companies attract investors, some argue that the added complexity can actually put them off.
“When there is so much complexity in terms of the markets and regulation, there’s a great deal to be said for having an equity story that is simple,” says Alex Tamlyn, a partner at City law firm DLA Piper who specialises in capital markets. “Dual-headed structures are anything but simple.”
Shareholder confusion was one of the concerns cited in a report commissioned by Elliott to examine the potential benefits of unifying BHP. The report found that former DLCs such as Royal Dutch Shell and Zurich rose in value by an average of 18.7pc between announcing plans to merge and completing the process.
But chief executive Andrew Mackenzie has so far been unconvinced by that, arguing that “every unification is different”.
A key part of Elliott’s argument has focused on the tax implications of the DLC for Australian shareholders. Companies there accrue franking credits based on the amount of profit they make in the country. At present some of those profits flow back to the UK business, which means BHP Ltd, the Australian arm, has accrued a pile of unused credits, which Elliott sees as going to waste.
BHP argues that wouldn’t change much even if the two companies did unify because the credits can only be cashed in by Australian taxpayers, and half of its shareholders are foreign.
Elliott also suggests that the structure hampers BHP’s ability to buy other businesses. BHP has several objections, though, not least fears it could lose its prestigious FTSE 100 listing. Membership of the index is theoretically dependant on having a headquarters in the UK, though Elliott has pointed to exceptions that have been made, such as for German-owned holiday firm Tui.
The miner is also concerned that leaving London would expose its Singapore arm to US$400m worth of Australian “top-up taxes” which it currently avoids.
But with other companies abandoning their DLC structures in favour of more simplicity and Mackenzie himself acknowledging a “potential prize to unification”, it seems Elliott is likely to eventually get its way.