Dual-Listed Companies
A Dual-Listed Company (DLC) is a corporate structure where two legally separate companies, usually listed in different countries, agree to operate as a single economic business. They do this by signing an equalization agreement that specifies how the combined future cash flows of the unified enterprise will be split between the two sets of shareholders.
There are three ways of structuring a DLC:
- In the Combined Entities Structure, a holding-company layer links the two listed firms and pays dividends according to the predefined equalization ratio, while each firm still maintains its own shareholder base, domicile, and exchange listing.
- In the Separate Entities Structure, there is no holding company, operating activities remain owned by each of the two legal entities, and the equalization agreement specifies the equalized payments to shareholders, with each firm still keeping its own shareholder base, domicile, and listing.
- In the Stapled-Stock Structure, there is no holding company, and shares in the two firms are stapled so they are contractually bound and trade only as a single saleable unit, even though the underlying firms still have separate shareholder bases, domiciles, and listings.
Because both listings are claims on the same underlying stream of value, the Law of One Price implies their market values should stay in the equalization ratio and their prices should move closely together.
In practice, the two listings generally trade at different relative prices and even have different return patterns due to market frictions, investor clienteles, and limits to arbitrage, which is why DLCs are often treated as “twin securities” and used to study mispricing.
- Mispricings in DLCs can persist for a long time, despite the two companies being nearly perfect substitutes, and presents a 10% average profit opportunity per year, as a result of limited arbitrage.
- One way to profit from DLC mispricings is using a convergence trade: short the expensive company and long the cheap company.
- This trade is hedged against fundamental risk, and makes (loses) money if the premium/spread shrinks (expands).
- However, the trade is also exposed to horizon risk, as holding periods can take multiple years, and noise-trader risk – the volatility of DLC arbitrage exceeds the risk of investing in the S&P 500 by
Due to mispricings, a DLC may choose to unify using a stock swap, or by creating a new entity.