The $78b question: Why a small investor is attacking Rio Tinto

A small UK activist shareholder has ratcheted up its attempt to pressure Rio Tinto into dissolving its dual-listed company structure, reprising the assault that Elliott Management launched against BHP’s structure in 2017.

While Elliott Management eventually got much of what it wished for, after BHP had cleaned out the UK-listed part of its structure, Palliser Capital might find it even tougher.

Palliser chose to produce a full-scale presentation of its critique of Rio’s structure last week, hours ahead of a UK investor day presentation by Rio’s Jakob Stausholm and his executive team, complete with a dedicated website, unifyrio.com, borrowing from Elliott’s playbook.

The activist investor wants Rio Tinto to abandon its dual-listing structure.Credit: Krystle Wright

It claims that a combination of Rio’s inability to conduct mergers and acquisitions because of the structure and a “sub-optimal” use of its franking credits has cost the group $US50 billion ($78 billion) and accounts for a $US24 billion ($37.5 billion) valuation gap between the shares in the UK-listed Rio Tinto Plc and the Australian-listed Rio Tinto Ltd.

At face value, given the success of BHP’s collapsing of its dual-listed entity structure and its subsequent performance, the notion of Rio following suit has some appeal.

However, significant differences between the two companies and their structures undermine the strength of BHP’s experience as a template for Rio to follow.

BHP, which created its dual-listed company (DLC) structure to effect the merger with Billiton in 2001, was and is an Australian company with a clear majority of Australian shareholders. When it unwound its structure in 2022 the Ltd shareholders owned about 58 per cent of the group.

It had resisted Elliott’s campaign, arguing dissolution of its structure would cost $US3 billion and produce minimal benefit.

When a High Court decision removed the tax effectiveness of a Singapore marketing hub that was jointly owned by the Australian and UK entities, and BHP wrote off the value of its NSW thermal coal assets and $US650 million of tax losses associated with them, however, there was essentially nothing of value left within the UK entity. BHP had previously offloaded most of the Billiton assets via the spin-off of South32.

Rio’s ownership is split 77:23 between the UK and Australian businesses, even though Australia – mainly because of its West Australian iron ore operations – contributes about 80 per cent of the combined group earnings. It’s a UK company, overwhelmingly owned by UK investors or via the UK listing, not an Australian one.

Rio Tinto CEO Jakob Stausholm. Rio says the cost of dissolving its DLC would be in the “mid-single-digit” billions.Credit: Jamila Toderas

Unlike BHP when it collapsed its DLC, Rio also has significant assets within the Plc entity. Everything Rio does outside Australia is held within the UK entity, including its share of the giant Escondida copper mine in Chile.

While Plc’s contribution to the combined group has been dwarfed by the Australian earnings, with Oyu Tolgoi ramping up, Simandou nearing production and the recent acquisition of Arcadia Lithium, the Plc contribution should swell.

Once Donald Trump is back in the White House, the prospects of the long-running attempts by Rio and BHP to develop the Resolution Copper mine in Arizona – a mine that could supply up to 25 per cent of US demand – would also improve.

Rio, as with BHP in its initial response to the Elliott campaign, says the cost of dissolving its DLC would be in the “mid-single-digit” billions.

There would also be an enormous “flow back” of shares as the investors holding more than three-quarters of the shares via the UK listing bailed out if, as Pallister indicates, Australia became the primary listing.

The DLC structure has some significant advantages over a conventional structure.

It initially enabled a merger without tax consequences for the shareholders or companies. It created access to two sets of shareholders and two pools of capital in two different markets. It also enabled Rio and BHP to do something no other companies have been able to do and “stream” franked dividends to Australian shareholders.

The disadvantage, given the disproportionate reliance on Australian earnings, internal transfers of cash that waste a significant amount of those franking credits are needed to give the UK shares the same dividends as those received by Ltd shareholders. That’s where Palliser’s argument that there is $US14.7 billion of value foregone through the sub-optimal use of the credits comes from.

However, if the DLC was collapsed and Rio’s earnings from its assets outside Australia grow as expected, it is conceivable that its future dividends might only be partly franked. Assuming there would still be a significant level of foreign shareholdings, there would still be franking credit leakage because those shareholders get no benefit from the credits.

Rio hasn’t used its scrip for M&A, although, theoretically, it could issue shares from either or both entities. It hasn’t needed to for the relatively modest acquisitions it has made in recent years.

It would be more complicated than if it were a single entity – Rio can’t do anything that advantages or disadvantages one of the entities relative to the other – but, over the nearly three decades of the DLC’s existence, it doesn’t appear to have been a material impediment to its ambitions.

The fact that Rio is, and always has been, UK-listed and headquartered where BHP was very much the “Big Australian”, adds a cultural element to the discussion. It would take a 75 per cent majority in each entity to dissolve the structure.

Given the London market’s loss of some of its biggest and most prestigious listings, would enough UK shareholders be prepared to contemplate losing one of their oldest companies with a history dating back to 1873?

Vale David Crawford

For the best part of a half-century, David Crawford, who died late last week, was a very significant figure in Australian corporate life.

“Crawf,” as he was affectionately known, first came to prominence as an insolvency practitioner with KPMG in the 1980s, managing some of the most complex corporate administrations – Massey-Ferguson, International Harvester, Trustees Executors and then the spate of post-1987 sharemarket collapses like Adsteam, Ariadne, Bond Brewing, John Elliott’s Harlin Holdings, Laurie Connell’s Rothwells and Christopher Skase’s Qintex among them.

David Crawford made an immense contribution to Australian corporate life. Credit: Wayne Taylor

Crawford helped pioneer a new form of insolvency. Where previously banks would take control of a collapsed company and sell off its assets, Crawford and the new wave of insolvency practitioners who followed him worked to restructure, rehabilitate and preserve the companies as going concerns.

After his professional career, Crawford was in heavy demand as a non-executive director, with a portfolio that included the chairs of Lendlease, Foster’s and South 32, and directorships of Westpac and BHP.

He was also credited with writing reports that transformed the administrations of Australian rules football, soccer and cricket.

It is impossible to be a top-level insolvency practitioner without a certain level of toughness and ego but Crawford, if he had those qualities, disguised them well.

He had a gentle, dry wit, projected decency and character and was universally admired by all who knew him. He was also renowned for being able to ask the most penetrating and uncomfortable (for management) questions within a boardroom in the most innocent of fashions.

If you were asked to nominate the most significant figures of the past half-century in Australian business it is unlikely Crawford, who always sought a low profile, would be front of mind – but he should be.

The Business Briefing newsletter delivers major stories, exclusive coverage and expert opinion. Sign up to get it every weekday morning.