What is a dual-listed company structure?

Rio Tinto has an unusual dual-listed company (DLC) ownership structure comprised of two separate legal entities backed by various complex contractual arrangements to ensure the two companies operate as a single economic entity.

The first entity, Rio Tinto (Plc), is incorporated in the UK and listed on the LSE with a NYSE ADR.

  • 77% of Rio Tinto’s shareholders hold Plc but Plc contributes to less than 20% of the combined group’s EBITDA.

The second entity is Rio Tinto Limited (Ltd), which is incorporated in Australia and listed on the ASX.

  • 23% of Rio Tinto’s shareholders hold Ltd and it contributes to more than 80% of the combined group’s EBITDA.

Would unifying the ownership structure mean Rio Tinto would have to give up its LSE listing?

No. An LSE listing can be maintained in a unification of Rio Tinto’s ownership structure.

How common are DLC structures?

  • DLC structures are not common and have proven to be short-lived.
  • All other large cap companies with DLC structures have unwound them.
  • Rio Tinto’s 29-year-old DLC structure has outlived its use and is no longer fit-for-purpose.

What has been the consequence of Rio Tinto’s DLC structure for shareholders?

  • We believe Rio Tinto’s complex DLC structure has proved to be value destructive for shareholders because of its multiple serious inefficiencies:
    • Strategic Inhibitor: By our estimations, the company’s inability to offer an industry standard mix of cash and equity for its acquisitions has cost shareholders an unnecessary c.US$35.6 billion in book value since the inception of the DLC structure in 1995.
    • Inefficient utilization of franking credits: Our independent tax analysis found that c.US$14.7 billion in additional franking credits could have been utilized in that same period without the DLC.
    • Creating a sub-par corporate governance framework: Duplication, obfuscated rights and governance complexity of Plc and Ltd have resulted in Rio Tinto ending up a far less appealing investment proposition compared to its simpler DLC-free peers.
  • Today, there is a glaring US$24bn structural valuation gap between the supposedly “equivalent” shares of the two entities (as at 29 November 2024).

What are the key value destructive features of the DLC structure?

Market Inefficiency

  • Glaring US$24bn structural value gap between the PLC and LTD shares (as at 29 November 2024).

Strategic Inhibitors

  • Restricted ability to execute stock-based M&A, which exposes shareholders to the unnecessary risks of overpriced cash-only acquisitions in a highly cyclical industry.
  • Buyback complications.
  • Adds significant complexity to corporate actions, including demergers.

Tax Inefficiency

  • Independent tax analysis estimates that c.US$14.7 billion fewer franking credits have been utilized under the DLC structure since 1995, compared to if Rio Tinto was set up as a conventional company.

Governance Complexity

  • Opaque and overly complex voting structures and governance framework.

Unnecessary Costs & Distraction

  • Duplication of costs and administrative burden including two sets of registrars, company secretaries, AGMs etc.
  • Additional regulatory and legal regimes.
  • Ineffective use of group resources and management’s time.

What are the benefits of unification?

Unification would resolve the value destructive inefficiencies of the DLC structure, presenting a path to a US$28 billion (27%) near-term upside for Plc shareholders and further upside for the combined group over the medium term. A normalised structure would unlock significant benefits for a more agile Rio Tinto:

  • Capital Efficiency: an immediate release of US$24bn of unrealized value trapped inside the Plc/Ltd price differential, creating a single fungible instrument with a global share price.
  • Strategic Flexibility: an ability to optimize shareholder value with all capital allocation tools at management’s disposal, including stock-based M&A. Stock-based M&A would not only enable the required diversification of Rio Tinto’s portfolio in an era characterized by intense competition amongst key mining industry players to secure scarce supply of metals critical to the energy transition, but also enable risk-sharing to avoid the unnecessary value destruction associated with over-priced cash-only acquisitions in a highly cyclical industry.
  • Tax Optimization: increased utilization of franking credits.
  • Simplicity: a simple and clear corporate governance structure, which complies with best-in-class ESG practices and finally places Rio Tinto on a level-playing field with its DLC-free peers.

What are franking credits and why are they valuable?

Franking credits prevent double taxation in Australia by allowing Australian corporates to “frank” dividends paid to shareholders by attaching a credit (generated at a rate of 30%) for taxes already paid at the corporate level on Australian income.

Franking credits offset Australian taxpayers’ tax liability on Ltd dividends and other frankable distributions, resulting in cash refunds from the Australian Tax Office (ATO).

However, franking credits are locked up at Ltd until their value is released through shareholder distributions.

Have there been similar unification efforts at similar companies? What were the results?

The rationale for unifying Rio Tinto closely mirrors that applied to BHP when it unified in 2022.

BHP received overwhelming shareholder support for unification (97/98% in favor by Plc/Ltd shareholders, respectively).

Since announcement and the completion of its own unification, BHP’s total shareholder return has consistently outperformed Rio Tinto’s.

What is the process for unifying Rio Tinto?

There are a number of pathways to unifying Rio Tinto’s ownership structure, the simplest being the tried and tested approach implemented by BHP of a one-for-one exchange of Plc shares for new Ltd shares.

Post-unification, all Rio Tinto shareholders would own shares in Ltd, which would continue to be domiciled in Australia, with a primary listing on the ASX and ongoing LSE and NYSE (ADR) listings.

Why hasn't Rio Tinto unified yet?

  • Amongst other reasons, Rio Tinto management has argued that unification would be costly and unlikely to receive sufficient shareholder support. In our view, its defense falls woefully short of assuring the market of the merits of maintaining the status quo and is easy to disprove: 
    • Claim 1 - Unification would be costly: We estimate that the one-off transaction costs should total c.US$400 million. Management’s friction costs of “mid- single billions of dollars” consists primarily of an estimated c.US$140 million of additional annual tax expenses that would be payable by a unified Rio Tinto going forward (as per independent tax analysis and assuming implementation of appropriate restructuring options). Given what is at stake, a figure that represents a less than 2% increase in annual tax paid by Rio Tinto and less than 0.6% of the group’s annual EBITDA does not even come close to an acceptable reason to delay the inevitable.
    • Claim 2 - Securing shareholder support would be “impossible”: Shareholders of former DLCs have almost unanimously voted in favour of unification, indicating their unequivocal preference to replace its complicated and cumbersome features with a simplified conventional structure.
  • In our view, the only appropriate and logical next step for Rio Tinto is to instigate an independent, comprehensive and fully transparent review on whether unification of Rio Tinto’s DLC structure is in the best interests of its shareholders.