SAB deal’s wider implications
Local ETF investors have a lot to consider, as funds’ profiles will change fundamentally
hen you buy an index tracker, how closely do you look at the components that make up that index? I know I don’t — it’s just an index, right?
The Industrial 25 contains the 25 biggest industrial shares listed on the JSE, with a few rules that exclude or limit some shares based on their SA free float. And the Top 40 — whether packaged and sold as an ETF, or a unit trust by Satrix, RMB or any of the other houses — gives access to the 40 largest shares on the JSE, subject to the same rules.
So when I got to thinking about SABMiller’s potential buyout by Anheuser-Busch InBev I paused to consider the wider implications for ETFs. The last time there was a deal of this significance and size on the exchange was when British American Tobacco (BAT) was unbundled from Richemont and Remgro seven years ago. After BAT, SABMiller is the All Share’s second-largest share. But due to its limited local free float, many indices exclude or restrict BAT.
While it is still early days, and there are many moving parts, etfSA strategist Nerina Visser says it’s possible to work out some early, pro-forma calculations. We know the offer price and how many shares of SABMiller are available for free float, excluding the 41% held by the company’s largest shareholder, Altria. Also, only 17% of SABMiller’s shares are on the register of Strate, the country’s securities depository.
Jenny Albrecht, portfolio manager at Satrix, very kindly supplied me with a few calculations to illustrate just how big the impact will be on its funds — with different outcomes depending on whether AB InBev takes a secondary listing on the JSE and, if it does, whether there is sufficient stock on the Strate register to qualify for inclusion on the FTSE/JSE series of indices (5% is the minimum).
WBTI’s market capitalisation is almost twice that of Naspers, but its weighting in the Satrix 40 is under 4%, compared with 13,65% for Naspers — illustrating the significance of the local free float.
SABMiller has been a large component of the flagship Satrix 40 ETF since it was introduced back in 2000. It’s not the largest component, though; Naspers takes that honour due to its higher free float. Still, with a weighting of 13% SABMiller will leave a big hole to fill. So, here are a few scenarios. If AB InBev doesn’t qualify for inclusion: Pioneer Foods is at the top of the reserve list for the Satrix 40. But clearly, Pioneer is dwarfed by SABMiller in size. It would be included at the bottom of the index, with a weighting of just 0,5% at today’s calculations. All the other shares would have increased weightings, Naspers making up 15,6% of the fund.
If AB InBev is eligible for inclusion: it would come in at just 2,2% of the index due to the local share register at an assumed 5%. That would push Naspers’s weighting up to 15,35%.
The effects on the Swix 40 is quite different. SABMiller makes up 13% of the Top 40 but just 5,2% of the Swix. That’s because the shareholder-weighted Swix is adjusted not only for free float, but also to exclude shares listed on other exchanges. In this case, if AB InBev didn’t qualify for inclusion, Pioneer would come in at 0,65% and Naspers would be upweighted to just under 20%. If AB InBev is included in the Swix, it would have a 2,8% weighting. Naspers would rise to 19,5%.
On the Satrix Indi, Spar Food Group is top of the reserve list if AB InBev isn’t included.
Looking beyond the Satrix ETFs, which all track the FTSE/JSE index series, there are also implications for the ETFs based on the S&P Dow Jones indices. The S&P Dow Jones indices aren’t bound by the same rules as the FTSE/JSE indices, but they also take the float available on the Strate register into account.
Most affected is Absa’s NewFunds S&P Givi SA Industrials. SABMiller makes up 30% of this index, but it’s difficult to predict what will replace it on the index as the architects of the Givi also consider a number of other fundamental factors. CoreShares uses the S&P Dow Jones series as well, but its Top50 ETF has a cap in place, limiting weightings to 10%.
Local ETF investors have a lot to consider, as this will change funds’ profiles fundamentally. But if left to run its course the regular ETF rebalancing will take care of the changes. However, direct investors in SABMiller have to take charge of the situation themselves, as they are likely to end up with cash that they will have to find a new home for. They will also be liable for capital gains tax, which ETF investors will trigger only when they eventually sell out of their fund.