Management’s decision to retain the DLC structure conflicts starkly
with the global opinion that the archaic structure lacks durability
and that the interests of shareholders are best served though a
conventional company structure. With such an extreme difference
of opinion on a topic of such critical importance, the logical next
step must be to test the anomalous conclusions of management’s
internal review through our requested review.
There is so much at stake for shareholders – indeed, Palliser Capital
(UK) Limited and its affiliates (together, “Palliser”) believe that
unification has the potential to unlock US$28 billion (27%) of upside
in the near term for the shareholders of Rio Tinto Plc and further
upside for the combined group over the medium term:
https://unifyrio.com.
Almost every other company with a DLC structure has already
successfully unified it. Their directors – a cumulative >136 of them
– concluded that the outdated structure was no longer working
because of its serious inefficiencies. In all but one case, both ISS and
Glass Lewis found their reasons for unification so persuasive that
they recommended shareholders vote in favour of it.1
And that is
exactly what shareholders did – by an overwhelming c.98%,
on average.
Indeed, the DLC-unwind of Rio Tinto’s closest peer, BHP, was
recommended by each of its directors and approved by 97% of
the shareholders who voted, many of whom are also shareholders
in Rio Tinto. Even though BHP’s Australian line traded at a premium
of 15%-20% to its UK line at the time, the shareholders in the
Australian entity (98%) still believed that they would be better off
under a single holding company rather than in two asymmetrical
parts. BHP’s independent expert, Grant Samuel, set out the
compelling rationale for why its shareholders were better off
in a unified structure, much of which would evidently apply to
Rio Tinto: https://www.bhp.com/-/media/documents/investors/
shareholderinformation/2021/unification/3circular.pdf.
Time and time again, similar shortcomings of the DLC structure have
been identified by directors and experts alike, as the reason for an
unwind: (1) an inefficient capital structure; (2) impediment on capital
allocation options; (3) a sub-optimal corporate governance regime;
and (4) in the case of the UK/Australian DLCs, under-utilisation
of franking credits.
Palliser have assessed the financial impact of some of these
deficiencies on Rio Tinto’s shareholders over the 30 year period
since Rio Tinto incepted its DLC structure – which has seen
6 chairmen, 7 CEOs, 5 CFOs, 71 directors, 60 members of the
executive committee and multiple market cycles come and go.
1. Since establishment in 2004, Glass Lewis recommended for unification, save for Thomson Reuters’ because the post-unification legal requirements on executive pay
were not as stringent as those under the DLC structure.
2. Based on Rio Tinto’s reported taxes for 2023.
3. Excludes tender offers for minority shareholders in existing listed subsidiaries which included a cash or scrip alternative.
4. Rio Tinto implied total shareholder return based on weighting of total shares outstanding across Plc and Limited.
5. All figures are calculated as at 29 November 2024.
Through independent expert analysis, they estimate that
shareholders would have been c.US$50 billion better off so far,
without the legacy structure:
– Rio Tinto’s inability to offer an industry standard mix of
cash and equity for its acquisitions has cost shareholders
c.US$35.6 billion in additional book value; and
– in a failure to achieve the DLC’s own stated objective, an
estimated c.US$14.7 billion less franking credits have been
utilised under the DLC structure compared to if Rio Tinto had
been set up as an Australian holding company in 1995.
Today, the outdated structure is alone responsible for a glaring
US$24 billion valuation gap between the supposedly “equivalent”
shares of Rio Tinto Plc and Rio Tinto Limited.
With such a persuasive rationale for unification, management’s
conclusion to maintain a corporate structure that every other large
cap DLC has moved on from makes little sense:
– Management asserts that unification would cost “mid-single digit
billions of dollars”: Palliser estimates that the one-off transaction
costs would total c.US$400 million. Furthermore, their
independent tax analysis indicates that management’s figure
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, representing a <2% increase in annual tax paid by
Rio Tinto2 and <0.6% of the group’s annual EBITDA.
– Management claims that the DLC structure is no impediment
to stock-based M&A: In reality, Rio Tinto has funded 100% of
its acquisitions entirely with cash over the last 3 decades.3
This position is not only unsustainable but could seriously
hinder Rio Tinto’s ability to diversify its portfolio at a time when
key mining industry players are racing to secure scarce supply
of metals critical to the energy transition.
– Management predicts that the share price of a unified Rio Tinto
would trade “down in a double-digit percent”: This did not
happen in the highly comparable case of BHP, so why would it
happen to Rio Tinto? Indeed, BHP’s total shareholder return has
consistently outperformed Rio Tinto’s since announcement and
completion of its own unification.4
– Management asserts that shareholder approval for unification
would “be impossible”: Past precedents highlight the unequivocal
preference of former DLC shareholders for a simplified
corporate structure. With an average DLC shelf life of 9 years
(excluding the Shell and Unilever anomalies), their shareholders
did not have to wait so long before they were afforded the
choice to unify. Management’s reasons to retain the status quo do not stand
up against the weight of global evidence in favour of unification.
With Palliser demonstrating the severe value-destruction caused
by the DLC structure as well as the value-maximising opportunity
unlocked through unification, it is only appropriate that Rio Tinto now
conducts the more vigorous review we are seeking. Our request is
not onerous but it is essential to properly assure shareholders that
their ownership structure is truly suitable for the second largest
mining company in the world.5”