1. The document discusses mispricing that can occur in dual-listed companies (DLCs) using Unilever as a case study. A DLC has two parent companies in different countries that operate as a single entity. 2. It explains how to measure mispricing in a DLC by calculating a theoretical price ratio between the two parent companies' shares based on their total values and number of shares outstanding. Any deviation from this ratio indicates mispricing. 3. Using real share price data from Unilever's Dutch and UK parent companies, it performs the calculation and finds that the UK shares were undervalued on that date relative to the Dutch shares, indicating mispricing existed.

1. Heilbronn University
Finance Project
Mispricing in DLC – The case of Unilever
submitted to
Herr Prof. Ted Azarmi
from
Nguyen Viet Hoa (178121)
Summer Semester 2012

2. 2
Table of Contents
Introduction ..........................................................................3
1/ Dual-listed company (DLC) .............................................3
The DLC structure of Unilever ..........................................3
2/ Mispricing in Dual Listed Company ................................4
An example using real data of Unilever share prices .........8
3/ Arbitrage opportunity .......................................................8
References ............................................................................9

3. 3
Introduction
Mispricing at DLC has been observed and recognised as a phenomenon,
Mispricing paves the way for arbitrageur, however, in existing literature on this
issue, Rosenthal and Young (1990, JFE), and De Jong, Rosenthal and Van Dijk
(2009, Review of Finance). have shown that arbitrage profit from arbitrage in DLC
insignificant, and thus making the arbitrage implausible. This paper sets out to
shed light on the phenomenon of mispricing in DLC. Firstly, the definition of DLC
and its features are presented with the illustration of the specific case of Unilever.
Secondly, the concept of mispricing and how it is measured is presented and
explained for the specific case of Unilever with examples from real data. Thirdly,
the possibility of arbitrage and is considered; whether arbitrage is successful in
eliminating mispricing is also another question that is addressed.
1/ Dual-listed company (DLC)
In a dual-listed company (DLC) structure, there are two companies – each of
which is refered to as a DLC parents. The 2 DLC parents are established in
different countries. They engage in a contract, agreeing to operate thir business as
a single enterprise. At the same time, they remain separate legal identity and
separate outstanding stock exchange listings.The shares from DLC parents
should have identical underlying cash flow. It is expected that the share of the 2
DLC parents have identical value in an integrated and efficient financial market.
(De Jong et al 2009).
The DLC structure of Unilever
The specific firm in this paper – Unilever is a DLC that consists of Unilever N.V
from the Netherlands, and Unilever PLC from the Unitd Kingdom. These 2
companies has adopted a DLC structure since 1930 with an identical boards of
directors. the two parent DLCs remains separate legal entities and separate stock
exchange listings. Each parent DLC is subject to different laws and regulations in
the Netherlands and in the United Kingdom. On the other hand, they operate as a
single economic identity.

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An “equalisation” agreements was created to strive for identical positions between
shareholders in the 2 companies as if they had the share in a single company. The
DLC parents are bound to pay as near as possible to equal dividends to the
shareholders,( provided exchange-rate fluctuations between sterling and euros).
“[The dividends distribution is made upon] the footing that the dividend paid on
every EUR 0.16 nominal of capital in the Dutch Company at the relevant rate of
exchange shall be equal in value to the dividend paid on every 3 1/9 pence
nominal of capital in the English company."
In addition, in the case of liquidation:
“[Any remaining surplus, after payment for preference shares] are deemed to be
pooled and distributed or allocated amongst the holders of the Ordinary Shares of
both Companies upon the footing that the sum paid or allocated on every EUR
0.16 nominal of capital in the Dutch Company...shall be equal in value to the some
allocated or paid on every 3 1/9 pnce nominal of capital in the English Company."
(Unilever Equalisation Agreement, 2009).
2/ Mispricing in Dual Listed Company
As can be seen from the description of a DLC above, the share prices of the DLCs
are supposed to give shareholders of both companies identical position. However,
in fact, the value of share of the DLC parents might not be the same. In other
words, mispricing in practice exist in DLCs. In Royal Dutch Shell, early 1980s,
Royal Dutch NV was trading at a price 30% lower than that of Shell Transport and
Trading PLC. In addition, studies in academic finance literature of Rosefrnthal and

5. 5
Young (JFE, 1990), Froot and Dabora (JFE, 1999) present considerable
mispricing that has existed over a long time in Royal Dutch Shell, Unilever, and
Smithkline Beecham.
We will take a look at the specific case of Unilever to find out how the mispricing is
measured, based on what we know about the equalisation agreement. Unilever
N.V (the Netherland) has shares listing in EuroNext Amsterdam stock market (in
euro), and New York Stock Exchange (NYSE) (in US dollar). In both market each
trading share of Unilever N.V are counted as an ordinary N.V share. Unilever PLC
(the United Kingdom) has shares listing in London Stock Market (in pound
sterling), and also in New York Stock Exchange (NYSE) (in US dollar). The
shares trading in LSE are counted as ordinary PLC shares. There is, however, a
difference of Unilever PLC stocks in NYSE. Unilever PLC outstanding stocks in
NYSE are refered to as Unilever PLC ADR (ADR stands for American Repository
Receipt). In assessing the mispricing in Unilever, it is important to discern this
difference and to look for the PLC ADR/ordinary PLC ratio for future calculation.
The current ration is 1:1, one PLC ADR represents one Ordinary PLC.
“An American Depositary Receipt or ADR is a negotiable instrument that
represents ownership in securities of a non-U.S. company; it is a mechanism that
facilitates U.S. trading of non-U.S. securities. ADRs provide U.S. investors with a
convenient way to invest in overseas securities. ADRs are issued by a depositary
bank and are traded in the same manner as shares in U.S. companies on the New
York Stock Exchange (NYSE), the American Stock Exchange (AMEX), Nasdaq
and the over-the-counter (OTC) market.” (Unilever official website,
shareholders info)
To illustrate how the mispricing between parents stock in DLC is measured, we
look at the mispricing phenomenon of Unilever DLC in NYSE.. Similarly, each
Unilever PLC ADR in NYSE represents one Unilever PLC ordinary share.
As mentioned above, the Equalisation Agreement between NV and PLC states
that “each Unilever NV ordinary share of €0.16 represents the same underlying
economic interest in the Unilever Group as each Unilever PLC ordinary share of

6. 6
3 1/9 pence (safe for exchange rate fluctuations)”. Since each PLC ADR in New
York represents 1 underlying ordinary PLC share and each Unilever N.V stock
registered NYSE represents one underlying Unilever N.V ordinary share, the
equalisation agreement implies that a ratio of 1 NV New York registry share to 1
PLC ADR.
There are 1 714 727 700 Unilever N.V shares and 1 310 156 361 Unilever PLC
issued. The two parents DLC maintain equality in assets, cash flow, and dividend
allocations. However, it is shown above that the 2 parents do not issue the same
quantity of shares. Therefore, in order to ensure the positions of shareholders of
both companies close to identical, the prices of NV and PLC shares must follow a
certain ratio differs from 1. The reason for the ratio to be different from 1 is
because the 2 DLC parents have the same total value but different in the quantity
of shares.
It is therefore important to notice here that in order to approximate identical
postiions between shareholders of the 2 companies, it is not necessary that the
share price of each company be the same, but to follow a certain ratio. The matter
now is, therefore, to calculate that proportion so that we can get a theoretical parity
and then compare it to reality.
Let’s call the total value of Unilever N.V : T.
Since the 2 DLC parents in Unilever have equal total value, we have:
Total Value of Unilever PLC = Total Value of Unilever N.V = T
The value of one Unilever NV share (let’s call it VNV) equals the total value of
Unilever NV (T) divided by the total number of outstanding shares
(1 714 727 700):
VNV=
In a similar way, we can represent the value of one Unilever PLC share as the
following formula:

7. 7
VPLC=
Now we can calculate the theoretical ratio between the value of an Unilever N.V
share and an Unilever PLC share: VNV:VPLC. The Total value of each parent DLC
(T) is eliminated in our calculation:
VNV : VPLC = :
VNV : VPLC = x
= 0.7641
As has been stated above, in order to ensure close to identical position for
shareholders of the 2 companies, the prices of the 2 DLC parents share should
follow the ratio: VNV:VPLC or:
PNV/PPLC = VNV/VPLC= 0.7641
PNV is the price of NV shares.
PPLC is the price of PLC shares.
If the prices of Unilever parents shares are not mispriced, it follows from the
formula above that:
PPLC* 0.7641 = PNV or PPLC*0.7641 – PNV = 0 (a)
Otherwise, the share prices in Unilever DLC are mispriced. Using formula (a) with
input from real data, we can see whether the prices in Unilever DLC are mispriced
or not.
In practice, the result of calculation (a) will almost always never be 0 but a
negative or positive number. With each of these 2 cases, not only we can
conclude the mispricing of the shares but also we can tell which DLC parent share
is over/undervalued.
PPLC*0.7641 – PNV <0 or PPLC*0.7641<PNV when it should be: PPLC*0.7641= PNV.
That means PPLC is not high enough – namely, PLC ADR is undervalued; and
reversely, it can be said that PNV is too high – meaning, NV ADR is overvalued.
In the same way of reasoning, if PPLC*0.7641 – PNV >0 then PPLC is overvalued,
PNV is undervalued.

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An example using real data of Unilever share prices
At the end of trading day 10 July 2012, the prices of NV ADR and PLC ADR in
NYSE were the following:
NV ADR NY (USD) 33.07
PLC ADR NY (USD) 33.53
Using the formula above: PPLC*0.7641 – PNV with PPLC=33.53; PNV=33.07 . We
have:
PPLC*0.7641 – PNV = 33.53*0.7641 – 33.07 = -7.45 ≠ 0
We can conclude that at the end of 10 July 2012, share prices of NV ADR and
PLC ADR were mispriced. The PLC ADR share was undervalued and the NV ADR
share was onvervalued.
3/ Arbitrage opportunity
When the share prices in DLC are mispriced, as shown in the case of Unilever, it
is rational for investors to consider doing arbitrage – meaning, buy the share of the
undervalued parent and sell the share of the overvalued parent. In theory,
mispricing is supposed to be eliminate by arbitrage. However, literature on this
topic has consistently shown mispricing prevails in DLCs. Why is arbitrage not
effectual in eliminating ?
De Jong, Rosenthal, and Van Dijk (2009) contend that because the date of
convergence of the mispriced share prices are unidentifiable, DLC arbitrage
entails substantial uncertainty. De Jong et al (2009) also point out a large amount
of idiosyncratic risk in arbitrage strategies. These idiosyncratic impedes the
success of arbitrage, thereby, preventing arbitrage from eliminating mispricing in
DLC.

9. 9
References
Froot, K.A., and Dabora,E,M .(1999), How are stock prices affected by the location
of trade?, Journal of Financial Economics 53, p189-216
Jong,A, Rosenthal,L and Van Dijk,M . (2009). The Risk and Return of Arbitrage in
Dual-listed Companies. Review of Finance 13: p495-520.
Rosenthal, L., and Young,L (1990). The seemingly anomalous price behavior of
Royal Dutch/Shell and Unilever N.V./PLC, Journal of Financial Economics 26,
p123-141.
Unilever equalisation agreement, 2009. Retrieved on 28May,2012
from:http://www.unilever.com/images/ir_2009-06-
20%20Equalisation%20Agreement%20FINAL_tcm13-44490.pdf