Dual listed company structure

One option that may be available to the National Australia Bank (NAB), as part of its strategy of expansion in the UK market, is the adoption of a dual listed company (DLC) structure, Explain the nature of a DLC and examine the possible implications of the approach for the operations on the NAB.

Australian companies, particularly the larger multinational companies, are always seeking ways to expand their operations and find ways into new capital markets both nationally and internationally. Expansion strategies that are currently available to these companies include the merger and acquisition of not only domestic companies/competitors and assets, but also international ones. Companies that are in such positions are more often than not Australia’s larger companies, with multinational operations and are at the forefront of their respective industries. However, the problems that face these companies in their plans for expansion are varied and multifaceted. One expansion strategy to overcome these problems that is available to these companies is the adoption of dual-listed company (DLC) structures.

Dual-listed company structures are not a new concept, however they are growing in popularity with Australian companies. The first two companies that banded together to form a DLC structure were the Shell Transport and Trading Co. (United Kingdom) and Royal Dutch Petroleum (Netherlands) at the turn of the century in 1903. Since then a further 11 DLC company structures have been created of which five still remain. The popularity of DLC structures amongst Australian companies is emphasised by the fact that of the six well-known DLC’s three involve Australian companies, Rio Tinto Limited, BHP Billiton Limited and Brambles Industries Limited.

Dual-Listed Company structures are effectively contractual agreements between two companies, who agree to combine their management and operations, cash flows and assets, as if they were a single economic enterprise but keeping their own separate shareholders, exchange listings, tax residencies and are still considered separate legal entities. Due to this definition, dual listing, it should be noted differs significantly from cross listing. Whereas dual listing is the quasi merger of two companies, and the subsequent “merged” company listing on two stock exchanges, cross listing, is the listing of an individual company not only on the Australian Stock Exchange (ASX) but also on some secondary foreign exchange.

There are possibly many benefits from companies agreeing to combine under a DLC structure rather than merging or one company acquiring another. For two major Australian corporations, BHP and Brambles, to undertake such a venture with Billiton and GKN in 2001, implicitly implies there are advantages to be gained. Tax advantages include; there are no transfers of shares or assets, therefore shareholders are not subjected to capital gains tax and the company is not required to make any stamp duty payments. Usually the amortisation of the goodwill of the merged or acquired company is obligatory; however, this is not usually the case with a DLC set-up. The perceived National identity of the local twin, by potential investors, shareholders and the general public is not affected, as the company is still essential Australian, also if the companies are of similar size their corporate status is not altered as they avoid the appearance of having been taken over. The formation of a DLC structure possibly could avoid the fulfillment of pre-emptive rights, such as options in debt contracts, that third parties may have, due to existing contracts with either of the companies, that otherwise would be triggered by a conventional merger.

Another main motivation for Australian Companies to pursue dual listing is that it gives the company greater exposure in foreign capital markets. Rather than relying on foreign investors wanting to invest in Australian companies on the ASX, if the company is listed along side another company, as is the case with BHP Billtion, the combined company has access to not only Australian investors but also English investors. Dual listing is also advantageous for companies that are have large amounts of surplus cash to expand but cannot afford to do so due to the relative weakness of the Australian dollar against other currencies. By dual listing these companies have access to a choice of foreign currencies to initiate future acquisitions.

There are many advantages to forming a DLC structure, however, the fact that the majority of international mergers have not been structured thus, and the recent disbanding of a number of DLC’s alludes to the possibility that there are a number of disadvantages in the adoption of this structure. The existence of two independent sets of shareholders may at some times constrain the flexibility of management and at times may adversely affect their decisions and actions.

The existence of the DLC in two countries means that the company will have to conform to the accounting and the regulatory framework of both countries which is likely to be very costly. Complexity also arises in the governance and the administration of the company. Another disadvantage, that is especially important to the financial and banking sector is that, cross guarantees that the companies undertake with each other mean that they are exposed to each others credit risks and liabilities. This is not the only risk that the companies absorb. They also face the risk of exposure to new shareholders, markets, assets and territories that they may not have had any previous experience with. Share market liquidity is also believed to decrease as the investors are less likely to look favourably upon the DLC as the structure is quite complex and will thus be deemed as being less transparent and less attractive to the average investor.

As a part of its expansion strategy in the UK market, National Australia Bank has considered the possibility of adopting a DLC structure with a bank in the UK. This kind of deal will undoubtedly bring with it implications for the NAB; some advantageous to its operations and others not.

The NAB emerged the strongest and in the best position of the big four Australian banks after the debt frenzy of the late 1980s. In the 80’s ad 90’s, NAB began acquiring and broadening its assets in the UK market. Firstly it purchased three subsidiaries of Midland Bank in the UK and Ireland and then later acquired the Yorkshire Bank. These acquisitions resulted in the United Kingdom becoming the NAB group’s second largest market. In 1991, the UK accounted for 32% of the bank’s assets.

In 1997 the NAB reviewed and reconsidered the focus of the group’s banking and adopted a new vision and strategies to meet that goal. This was “To be the world’s leading financial services company.” This vision emphasised the desire of the group to truly become an international bank. The bank was well on the way as by this time the group’s overseas activities had grown to account for 46.7% of the group’s assets. In 2000, NAB sold one of its American acquisitions; it had purchased earlier for the substantial amount of $5.3billion, and was described as having “a healthy war chest”.

However, the problem that NAB faced is that the weakness of the Australian dollar against the English pound prevented the NAB from being able to acquire large companies in the UK, thus fuelling their expansion. The NAB also has the restriction placed on it under the Australian Government’s four-pillar policy that the NAB can not acquire any of the other larger Australian banks as a means for expansion. These reasons have prompted the group to adopt a dual-listed company structure approach with an appropriate partner in the UK should the opportunity present itself.

The fundamental problem facing the NAB is devising a DLC structure model that will not only be accepted by a UK bank, but also by the Australian Prudential Regulation Authority (APRA) and the British equivalent, the Financial Services Authority. The NAB is confident that they have devised a DLC model that would meet these requirements and be sanctioned by the aforementioned authorities. The regulatory authorities have concerns with a bank adopting a DLC structure, due to the bank making cross guarantees with another bank, exposing the NAB to new risks. This is particularly relevant as the increased risk exposure may place affect the bank’s ability to protect their depositors’ funds.

If the NAB did have a model that was accepted by APRA and the FSA, the bank would have an excellent opportunity to increase their market presence in the UK. During 2000 and 2001 it was reported that the NAB was in discussions with the UK bank Abbey National. The banks were of similar market capitalisation requiring NAB to raise in excess of an estimated amount of $47.6billion to acquire Abbey. However under a DLC structure the need to raise such a large amount of capital would not be required. If the banks did enter into a DLC structure this would have exposed the NAB to the southern region of the UK and raised their market presence in the UK from 4% of the market share to an estimated 15% of the competitive UK market. The first deal that the NAB first presented to Abbey management was rejected.

If the NAB could find a suitable UK bank to undertake a DLC arrangement it would give the group a new source of acquisition currency. If the deal with Abbey did proceed it would have given the NAB an increased opportunity to turn over greater profits than are currently accessible in the bank’s UK operations. This would give the combined DLC greater levels of excess profits in a stronger currency than the Australian dollar (English pound) enabling the bank to acquire more and more international assets. This would allow the NAB further expansion opportunities and aid the group in achieving its goal of being a truly international financial institution.

The decrease of the NAB’s share price liquidity may have a negative impact on the company if it were to adopt a DLC structure. During the late 90’s, the share market boom was mainly attributed to the large number of “mum and dad” investors investing in Australian blue chip companies including the NAB. If these investors felt that the transparency of the company was decreased as a result of a DLC structure, the lack of information available on the UK bank, may cause the average investor to invest in another of Australia’s big four banks.

A report released by the Reserve Bank of Australia stated that the formation of a DLC is beneficial in the sense that no assets or shares are traded between the two companies. This would be advantageous to the NAB as they would not required to pay stamp duties, and investors would not be subjected to Capital gains tax. The formation of the DLC is also advantageous to the NAB as the cross border dividend payments are subjected to excessive tax, whereas by forming a DLC the foreign investors in the company are not subjected to these taxes. The system also allows shareholders in both countries the advantage of being able to still undertake dividend imputation tax credits.

The NAB may find that the share price differential that has been historically noted in DLC structures may be a negative implication of adopting such a strategy. Theoretically, it is believed that such differentials should not exist, as the shares of the DLC should trade at the same price after currency conversions. In some DLC’s the differential has been as great as 30%. This was a contributing to factor to a number of the DLC’s that disbanded. The implication of this to the NAB is that if the company had a premium differential on the ASX, shareholders and investors in the UK would be less likely to invest in the company on the London Stock Exchange and would consider other investments.

The undertaking of a dual listed company by the National Australia Bank, as part of its expansion strategy would be a huge undertaking. The structure enables the bank to access new capital markets, without out-laying substantial amounts of capital. It allows the NAB to raise capital in a stronger currency for future acquisitions. The structure would also give the bank a much larger market share in the competitive UK banking sector, enabling the NAB to access more customers, and fuel expansion of the bank in the UK. However, the bank would face many hurdles along the way. The conformation to the requirements of APRA and the British FSA, would be a costly and time-consuming process. Not only would this requirement need to be met, but also the shareholders of not only the NAB, but also the management and the shareholders of the UK bank would need to be convinced of the advantages to be had by both companies. This could prove to be an arduous task given the implication to the pricing of the shares on both exchanges and the historical trend of companies disbanding from a DLC structure.

The NAB undertaking a dual listing structure, should the right opportunity present itself, could prove to be a fantastic opportunity for the bank to reach it’s goal of being a world leading financial institution. Should the union of the NAB with an UK bank prove to be an advantageous and profitable strategy, the implications for the rest of the Australian banking sector would be significant. It would be interesting to see whether any of the other four major Australian banks follow in the unprecedented footsteps of the country’s largest bank, the National Australia Bank.

Need a Accounting Papers?