Tuesday, May 15, 2007
Thomson Corporation and Reuters Group plc today announced an agreement to combine the two groups in a transaction that will create a new company, Thomson-Reuters Corporation, with a market capitalization in excess of $35 billion. The transaction will be effected using a dual-listed company structure.
I've blogged on this structure before:
[a] dual listed company 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. Examples of these arrangements are BHP/Billiton (BHP an Australian company and Billiton an English Company), Carnival (an English and Panamanian company), and Rio Tinto Group (an Australian and English company).
It is a way for companies in different jurisdictions to preserve beneficial dividend treatment (e.g., the franking credit in Australia) and inclusion in their home country indexes. It is also a mechanism to stem flow-back into one country or another as the shares in one company are not exchangeable for the other. Finally, because no company actually takes over the other and each remains domiciled in their home country, it is one way to salve issues of nationality or national security. Often, the arrangements are viewed a stepping stone to a full merger (as was the case of Brambles which unwound in 2005). But these arrangements are unwieldy and governance of multiple boards and nationalities sometimes a problem. This was why Unilever (the Anglo-Dutch DLC) unwound its structure in 2005. After Unilever, these structures fell out of favor -- viewed by practitioners as too unwieldy. And finally, there can be some bizarre results -- it is rumored that BHP/Billiton will make a bid for Rio Tinto Group; if it does so, the BHP English company would likely make a bid for RT's English pair; the BHP Australian company for RT's Australian pair. How the mechanics of each jurisdiction would work to accommodate this bid is uncertain."
The Reuters/Thomson transaction marks a resurrection for the DLC structure; it is likely being used in order to stop flow-back of shares to Canada and preserve the inclusion of the combined company in the FTSE 100 and other FTSE indexes. This will provide Thomson, a Canadian company ineligible for the S&P 500, with a much-needed index listing.
Thomson and Reuters have substantial overlap in publishing and there is significant antitrust risk on the deal (see the Seeking Alpha blog post here). The deal is preconditioned on obtaining all antitrust clearances, and Thomson in its press release stated it has agreed to take whatever steps are required to procure such clearances. Bloomberg reports that ABN Amro and Societe Generale lowered their recommendations on Reuters shares to ``hold'' , citing the potential for the deal to fall through due to antitrust risk.
One other point of note. The Reuters Family Share will be retained in Reuters and implemented in Thomson. The share will provide that no shareholder may hold more than 15% of the combined company and that if any person acquires, or seeks to acquire, more than 30% of the combined company, the share may exercise whatever votes are necessary to defeat a shareholder resolution. The Thomson family will be exempted from this provision so long as they uphold the Reuter Trust Principles. Separately, the combined board will be given the power to force a divestiture by any shareholder to an ownership below 15% of the combined company. The legality of all of these shareholder capping provisions under English and Canadian law and their takeover codes is uncertain, though yet to be tested.
For those interested, The Lawyer has a list of the law firms on the transaction. It is a good week for Shearman & Sterling who is advising on the U.S. antitrust aspects of the deal for Thomson and is also advising DaimlerChrysler on the sale of Chrysler.