The latest moves by European companies to list in the US are more radical than meets the eye. AstraZeneca Plc and TotalEnergies SE want to upgrade their existing US equity offering to stock from from quasi stock — a well-trodden path. But as ever, the devil is in the detail.
In each case, the idea is to convert the firm’s American depositary receipts to ordinary shares. ADRs are a tradable legal wrapper for non-US stock; the underlying share is warehoused by a financial institution such as Bank of New York Mellon Corp. The beauty of ADRs is that they simplify dealing in overseas companies for US investors, and give those corporations easy access to US demand. Switching to ordinary shares means grappling with the difficulties that ADRs circumvent.
First, consider AstraZeneca. In taking a full US listing, the settlement of its share trades moves to the US Depository Trust Co. Since it’s retaining the UK as a trading venue, the way its stock changes hands in London will have to now accommodate technical and regulatory constraints. This means wrapping the London shares in a legal structure called a depositary interest — which is free of UK stamp tax.
The drugmaker isn’t the first company trading in London to switch to DIs. But this is the first time a company of such standing will go stamp-free overnight while staying in the FTSE 100 index. So we’re about to see a controlled experiment in removing the UK’s controversial trading levy.
Moreover, AstraZeneca has sent a message that it may be worth taking a full US listing even if it does not involve entering the S&P 500 index – the aspiration of past migrations.
The esteemed US benchmark isn’t easy to access. The criteria include various American-flavored tick-boxes. The ultimate decision is made by a committee. In the hope of finding favor, past corporate migrants have either redomiciled or created “operational headquarters” in the US while downgrading their UK listing status and exiting the FTSE 100.
AstraZeneca isn’t bothering with that. Hence it won’t become an “index orphan” in limbo between two major benchmarks. Maybe the 100% certainty of being in the FTSE 100 beats the hard-to-guess possibility of joining the S&P 500. Hopefully for the UK, the difference between New York and London trading in one of its top companies won’t became characterized by active, engaged investors abroad and faceless passive flows at home.
France’s TotalEnergies may well be able to dodge the need for a DI-style wrapper. The oil major has said its ADR upgrade will have no impact on its existing Paris shareholders, implying that it’s found a way of creating seamless share dealing on either side of the Atlantic. The details have yet to emerge.
You don’t see French companies listed on Euronext having their ordinary shares trade in parallel in the US. The complexity of global clearing and settlement rules, and differences between the UK and French market plumbing, probably explain why it may, in fact, be possible. But again, this looks pioneering. Exciting times for capital-markets lawyers.
Amid all this, there are implication for ADRs. Their benefits come with additional costs for investors, although these are likely a minor factor in driving investment decisions. Companies will often prefer to have full US shares where possible. Everyone will be watching to see whether upgrading these big-name ADRs, both of which are already relatively liquid, makes much difference to US trading volumes and price-earnings ratios.
AstraZeneca is already highly valued. The most concrete upside is gaining a stronger acquisition and fundraising currency. TotalEnergies, by contrast, trades at a notable discount to US peers, so there’s more pressure on its ADR conversion to boost that valuation. It’s also not chasing S&P 500 membership.
Unlike TotalEnergies’s move, AstraZeneca’s is part of a clear trend in its home market. The UK firm has exposed how British tax policy incentivizes London-listed companies to go to the US. A root-and-branch review is needed in the UK. Much trading in UK stocks has already moved to stamp-exempt methods like contracts for difference. There’s no stamp tax on corporate bonds or crypto trading. Levying it on stocks just inflates the cost of capital of companies whose investment activity can actually help spur economic growth.
So the European corporate sector is being pretty innovative in seeking to capture the benefits of the US’s deep capital markets. If only the European authorities showed as much inventiveness in keeping companies at home.
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