Thursday, May 24, 2007
The rumors yesterday that BHP Billition was to be a white night for Alcan with respect to Alcoa's pending $28 billion offer to acquire Alcan, had me thinking about M&A nirvana: the Tri Listed Company. BHP Billion is a dual listed company. A DLC structure is a virtual merger structure utilized in cross-border transactions. The companies do not actually effect an acquisition of one another, but instead enter into an unbelievably complex set of agreements in which they agree to equalize their shares, run their operations collectively and share equally in profits, losses, dividends and any liquidation. In the case of BHP Billiton, this structure involves Billiton, an English company, and BHP, and Australian company.
If BHP Billiton were to acquire Alcan, it could do so by adding a third leg with Alcan and forming the world's first tri listed company. The agreements to do this would reach new levels of complexity (hence my thoughts of M&A nirvana), and the operation of the company could become a bit complex to say the least. For example, the shareholder meeting for the company would have to last almost 24 hours in order to encompass meetings on three continents for three companies. But the structure is feasible. Thomson, a Canadian company, and Reuters, an English company, showed its viability by recently agreeing to combine using this structure in the first English/Canadian DLC (see my blog post on this here). The Australian element should be able to fit within this framework.
And a BHP Billiton acquisition through a TLC would actually make good sense. It would assuage issues of Canadian nationalism by maintaining the presence of Alcan in Canada. It would preserve beneficial dividend tax treatment for Canadian shareholders and establish a strong Canadian shareholder base for the TLC. It would also avoid triggering any existent change of control provisions in any joint venture agreements that Alcan might have. Finally, an acquisition in this form would ensure that certain valuable hydroelectric, power and other rights and agreements that the Quebec government has granted to Alcan would not be terminated, an event Alcan asserts would happen with a true acquisition.
The above calculus would also apply if Rio Tinto decides to bid for Alcan. Rio Tinto like BHP Billiton is also a DLC involving an English company and an Australian one.
If BHP Billiton and Alcan (or Rio Tinto and Alcan) agreed to such a structure it would permit Alcoa to counter with its own DLC proposal thereby raising further complexity to this takeover battle. And if Alcoa succeeded this would also be a milestone as there has yet to be a true U.S. DLC. BP came close in 1998 with Amoco, but the SEC refused to allow pooling accounting and so it was at the last minute converted into a true acquisition. The closest is Carnival, a Panamanian and English DLC. Carnival's Panamanian company has equivalent U.S. corporate governance provisions and is treated as a U.S. tax-domiciled entity.
Final Note: Legal geeks should note that the SEC recently revised its position on the requirement to register the shares of newly-formed DLCs (or presumably TLCs). Historically, the SEC did not require a new registration statement to be filed as the shares of both companies remained outstanding and there was no triggering offering. But, with the Carnival DLC the SEC took the position that the changes in the character of the securities of the company were so fundamental that a registration statement is now required with respect to both sets of shares of the DLC. So, a BHP Billiton/Alcan tie-up would require reregistration of the shares of each of the three companies with the SEC unless U.S. holders constituted 10% or less of the company's shareholder base.