A BHP-Rio listing revolution

Plans by the ASX to list BHP Billiton Plc and Rio Tinto Plc, among other unsponsored depository receipts, have major implications for the companies and broader market.

Among a host of initiatives planned by ASX Ltd now that Elmer Funke Kupper has settled into the chief executive’s office is one that might finally resolve some of the peculiarities surrounding the trading in the two big dual-listed Anglo-Australia resource companies, BHP Billiton and Rio Tinto.

ASX plans to list unsponsored depository receipts over international shares, including the UK-listed BHP Billiton Plc and Rio Tinto Plc, allowing Australian investors to trade both the Australian and UK securities in this market for the first time.

The move has major implications for the two companies’ shareholders, and indeed the broader market.

The Rio dual-listed entity structure was created in 1995 when Rio Tinto and CRA merged, while the BHP structure was created for the merger with Billiton in 2001, so there is a significant track record of the trading in the two securities issued by both groups.

A dual-listed entity structure binds two separate legal entities together to create a single economic entity and exposure to its underlying assets and cash flows – in theory an Australian and UK share create exactly the same exposure to value.

In practice, however, there have been quite wide divergences in value, ranging from quite modest differentials to very wide ones. For most of their histories the two groups have tended to trade at premia in their home markets – BHP in Australia and Rio in the UK. That could be attributed to the larger shareholder bases and deeper liquidity in those markets.

According to a recent Goldman Sachs analysis, over the past three years, however, both the Plc versions of the stocks have traded at significant discounts to their Australian counterparts, with BHP’s UK-listed securities trading at an average discount of 19 per cent and Rio’s at an average discount of 24 per cent. That’s despite a focus of both groups’ capital management activities on their UK securities.
At the moment BHP’s Australian securities are trading at premia close to those three-year averages.

There isn’t any definitive explanation for why the different forms of securities with common economic exposures should trade so differently and why those differentials are largely arbitraged away, although the different home economies and markets, the currency relativities, weightings in sharemarket indices and tax and savings systems are probably all contributing factors.

Being able to trade both versions in the same market in the same currency should produce a more efficient arbitrage and perhaps reduce the discounts/premia between the two securities in each company.

In terms of the wider market, the ability to trade the Plc forms of the stock in this market would create a trading opportunity for fund managers with pure Australian-listed equities mandates as well as effectively bringing two more very large capitalisation stocks (and potentially a lot more) into the market.

It could also, however, increase the already intense concentration of the Australian sharemarket on the major resource companies and banks, which dominate the index weightings, if the depository receipts are included in the indices and fund managers (whether managers with index funds or those benchmarked against the indices) feel compelled to hold them.



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