SAB deal’s wider im­pli­ca­tions

Lo­cal ETF in­vestors have a lot to con­sider, as funds’ pro­files will change fun­da­men­tally

Financial Mail - Investors Monthly - - Analysis: Exchange-traded Funds -

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.

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