Delisting disappoints UK investors and analysts

Monday’s board decision prompted a jump in the shares on Tuesday, but the rally was tempered by fears some large British shareholders will have to cut or sell their stakes.

Chief executive Tom Glocer said he hoped UK shareholders - only five per cent of the company's combined shareholder base - would retain their investments after the reorganisation, but major institutional investors are likely to sell many or all of their shares, given the funds they manage are UK focused.

Reuters reported: "Tom Glocer was good enough to come and see me yesterday afternoon together with the two other remaining institutional shareholders in London, and I am bitterly disappointed," said one top-10 institutional investor who wished to remain anonymous.

The fund manager said he had hoped the company would leave it five years before reaching a decision on its listings.

"The dozy old UK institutions and sell-side analysts are only just realising that Thomson Reuters is a much better company than they thought," he said. "I think investors would have really come back to this one ... It's a real shame."

The company said the fragmentation in its share structure was deterring some investors.

Analysts at Numis Securities said they could see the benefits the simpler shareholder structure would bring but that they too were disappointed by the move.

"We have been firm supporters of the group, which was one of our key picks in Media 2009, and are therefore greatly saddened to see the delisting," they wrote, adding that many UK institutional investors would likely have to sell their stakes.

Numis had a Hold rating on the London-listed stock prior to news of the reorganisation but upgraded it to Add in order to reflect the discount relative to the US shares.

UBS analysts said any upside to the shares may be capped by the fact some institutional shareholders would have to sell stock and were less enthusiastic about the company's prospects, retaining a "sell" rating.

"We continue to believe the the fundamental value of the group overall remains too high," UBS analyst Phillip Huang said in a note. "We would expect to see evidence of deteriorating momentum near future, which combined with imminent increased liquidity, could put pressure on the Corp valuation." 

Meanwhile, the longstanding valuation spread between the stocks has already dropped to less than four per cent from 9.3 per cent and will continue to narrow, Huang said.

"[There] may be some offset from PLC holders selling if unable to hold Corp," he said.

In any event, London shares are likely to be driven down in value by virtue of the delisting announcement alone, so Huang has reiterated his "sell" rating and kept his price target of $23.50.

Todd Bourell, a partner at hedge fund ValueAct Capital, which owns 12 million Thomson Reuters shares in London and is one of the company's largest shareholders, said Thomson Reuters' London listing had become problematic for the company.

"The fact that the stock is irrationally undervalued in London is putting a drag on the value of the stock in New York and Toronto," Bourell said.

Canada's Thomson family is the largest shareholder of Thomson Reuters and holds a 55 per cent voting interest.

The Financial Times blamed “a more parochial investment approach” for bogging down Thomson Reuters.

“For a company that makes much of its money from professionals in globalised markets moving capital across borders at high speed, Thomson Reuters became oddly bogged down by a more parochial investment approach,” it said.

When Thomson Corp swooped on Reuters in the summer of 2007, it knew that some UK investors would have trouble holding the paper in its half-cash, half-shares £7.9 billion offer, the FT said.

To avoid a large scale defection of domestic institutions, it turned to a well-worn structure: the dual-listed company, or DLC.

The theory was that shareholders on either side of the Atlantic should be allowed to trade instruments of identical value, taking currency into account, on the local market of their choice.

Reuters’ London shares initially traded at a discount to Thomson’s North American listings until the deal completed in April 2008.

Such gaps are typical with uncompleted deals, as hedge funds bet on possible regulatory delays and other hurdles. Unusually, however, the discount did not disappear when the deal closed.

Over the year, the London line traded on average at a 15 per cent discount to the Toronto quote.

An instrument designed to smooth the takeover instead became an unexpected illustration of the inefficiencies that still exist in modern global markets, the FT said.

The fact that the DLC structure failed to behave as expected was described on Monday by one person close to the company as “irrational”, but analysts identify a number of reasons.

One factor was that the high concentration of the Thomson family’s stake in Canada limited liquidity in Toronto, benefiting the price by restricting opportunities for borrowing stock to sell short.

The simplest explanation, however, may be that UK investors have taken a more bearish stance towards the company, the FT said.

“Their North American peers, many in the company believe, focus less obsessively on the financial data business that serves hard-hit Wall Street and City of London traders and give more weight to its legal, scientific, healthcare, tax and accounting operations.”

For the group, a unified capital structure opens up the possibility of more stock-based acquisitions once turbulence subsides. Having two differently valued instruments could have complicated potential takeovers, especially while more than $5 billion of liquidity was effectively trapped in a pool outside North America.

According to Glocer: “In an age where our markets are global and electronic, brought that way in part because of us at Thomson Reuters, where these shares are traded is much less important to me than where our customers, employees and footprint are.” ■