Description
IThere is currently an opportunity to go long Thompson Reuters in London (TRIL LN) and short an equivalent number of shares of Thompson Reuters in the US or Canada (TRI in US, TRI CN in Canada). The shares are economically equivalent, but the US and Canadian shares trade at a 21.7% premium on a dollar basis to the London listed counterparts.
Background:
On April 17th 2008 Thomson and Reuters effectively merged creating Thomson Reuters. To complete the transaction, they used what is called a dual listing structure which from an investors perspective is a merger with some minor additional benefits (not critical to the thesis). As of April, there is a Thompson Reuters that trades on the LSE (TRIL LN) and a Thompson Reuters that trades on the Toronto exchange (TRI CN) and NYSE (TRI). While the shares are not exchangeable, they are meant to be identical. They have the same voting rights, the same dividends, the same boards, and the same management.
There are precedents for this type of dual listing, as well as a temporary gap in pricing. The company most often cited is Carnival Cruise Lines which had an approximately 10% price difference for 6 months before the gap closed.
There are a variety of hypotheses on the cause of the discrepancy. The conventional wisdom is that there are different shareholder profiles. British investors are more focused and less optimistic about the portions of the business catering to financial service firms and remember the struggles Reuters had during the last downturn in financial services. As the CEO said in August, “It's a tale of two cities. The North American investors know the professional side of the business well, and have got their heads around the markets division, but then in London, we trade at around a 20pc discount. It is a bit puzzling why there is such a large discount as a share in one place is exactly economically equal to another."
The company, management, and investor relations are aware of the discrepancy. When the company was completing their buyback, they were doing so in London. Recently, the Vice Chairman sold Canadian shares and bought London shares to take advantage of the pricing discrepancy.
Supporting Math and expected returns:
Buy long TRIL LN 1,545 pence * 1.754 (GBP/USD) = $27.10
Short TRI @ $32.97
32.97/27.10 = 21.7% premium
This is a bet that ultimately markets are efficient. The primary variables determining the expected return on this trade are the length of time it takes for the spread to close, the cost to borrow the US/Canadian shares, and stamp taxes/commissions. For Carnival Cruises it took six months for a smaller gap to close. We are currently 5 months into the dual listing structure for TRI. Our current borrow rate for the US/Canadian shares is 11% and I estimate the total commissions and stamp taxes at 1.5%. If it takes one year to close the gap, the expected return is 9%, and if the spread persists for longer than 1.8 years, we will lose money on the trade. However, if the gap closes in the next three months we will get a 17% return for taking no company risk and no market risk.
Catalyst
Limited - The company has not indicated a willingness or an inclination to make the shares exchangeable. They have completed their buyback.