Thomson Reuters Dual Listing: What's Behind the Widening Gap?

For interested investors it's no doubt come to their attention, the growing gap between New York listed Thomson Reuters Corp. (TRI) and Thomson Reuters Plc [TRIL.L], listed on the London exchange.

At the start of this week, according to UBS analyst Jeffrey Fan, the spread between the two listings had grown to 20% in the favor of the Corp., according to UBS analyst Jeffrey Fan, up from 15% just a week ago.

Mr. Fan said it's not uncommon for dual-listed companies to trade at a plus/minus of 10%, but added the current spread seems excessive.

He told clients in a note:

We believe the wide spread is being caused by limited availability of stock borrow on the Corp. with potential recalls by Canadian holders. As a result, the Corp. line has been squeezed higher over the past two weeks as investors cover short positions.

The analyst said he believes over time the spread will shrink back to the 10% range, but cautioned that, in today's risk averse environment where leverage is limited, there "may be few marginal buyers to narrow the spread and uncertainties over the outlook for financial markets may mean investors stay cautious on the underlying business."

The analyst said the Corp.'s premium over PLC is difficult to justify based on its current valuation at 18 times 2009 estimated earnings versus 15 times at the PLC. He added that competitor Reed Elsevier PLC has better earnings visibility and trades at 13 to 14 times 2009 estimated earnings.

Mr. Fan has a "sell" recommendation on Thomson Reuters Corp. with a $33 price target. The newly-merged company reported first quarter earnings Thursday morning.