This morning in London, SABMiller shareholders are meeting to vote on the proposed merger with Anheuser-Busch InBev (AB Inbev). For the deal to be approved, 75% of shareholders need to vote in favour.
The expectation is that the motion will be passed, triggering a series of events over the next few weeks.
A successful vote will mean that Thursday, September 29 will be the last day to trade SABMiller shares on the JSE. The stock will be suspended from the start of day on September 30, and will be de-listed at the close of day on October 4. SABMiller shareholders will receive their cash payment between 11 and 13 October.
As soon as SABMiller is suspended, it will also fall out of all local indices. This means that from the morning of Friday, September 30, the Top 40, the All Share Index and Industrial 25 in particular will all look rather different.
“SABMiller will be removed from these indices and we will replace it with the next highest ranked company on the reserve list at that point in time,” explains Mark Randall, the manager of indices and valuations at the JSE. “The value of the indices won’t change, and there is no value creation or destruction. It’s just a reallocation.”
Importantly, SABMiller will not be automatically replaced by AB Inbev. This is because this is a cash transaction. If SABMiller shareholders had received AB Inbev shares, then the newly-merged company would have come into the index immediately.
In this case, however, the transaction is cash only and will only be completed some days after SABMiller shares are suspended on the JSE. Also, AB Inbev does not currently qualify to make any JSE indices and cannot be considered until the next index review.
“At the last review AB Inbev did not qualify because it needs to have at least 1% of its shares on the local register before we add it,” Randall explains. “So the soonest it could come in to any indices would be at the next index review in December.”
Who’s next in line?
Currently, Impala Platinum would be the company to replace SABMiller in the Top 40, although the JSE has not yet confirmed this. Currently, however, Impala’s market cap is R49.6 billion, compared to SABMiller’s R1.3 trillion, so its addition would have an impact on the make-up of the index.
“There will be a large disparity in weights, so the weight of everything else in the index will go up,” Randall says.
Portfolio manager at Satrix, Johan Hugo, points out that SABMiller is currently around 13% of the Top 40. If Impala were to come in, it would make up only around 0.75%.
“So if you take out SABMiller and reallocate that weighting across the rest of the index, the biggest impact will be on Naspers,” Hugo says. “It’s weighting in the Top 40 will increase by 2.3% to around 19%. Richemont would get the second biggest bump, of close to 1%.”
In the Industrial 25 index, this impact will be even bigger. Hugo estimates that Naspers will go up to around 32% of this index. This not only poses problematic concentration risk, but is getting towards a point where the index could no longer be investable.
“The Financial Services Board (FSB) doesn’t allow fund managers to hold more than 35% in a single share in a sector-specific fund,” Hugo explains. “But this index is not capped, so if Naspers were to go over 35%, the JSE would let it continue to drift. However the index would no longer be investable for an index-tracking fund.”
How do index trackers handle SABMiller’s suspension?
Since index tracking products have to always track the index as it stands, they will be forced to re-balance their portfolios as soon as SABMiller falls out. This has to be done immediately, and they cannot sit with SABMiller shares in their portfolios waiting for the cash payout.
In other words, all index tracking products that currently hold SABMiller shares will have to sell them before the market closes on Thursday, September 29.
“We will have to trade in the closing auction, and reinvest the money from the sale of SABMiller shares into the rest of the index,” Hugo says.
Since this will be some very concentrated buying and selling, it is worth questioning whether this could create price distortions. However, Nerina Visser from etfSA.co.za says that it shouldn’t have much of an impact.
“The amount these funds will have to re-deploy is well within normal daily value traded for most of these shares, as they are sufficiently liquid,” Visser says. “Furthermore, whatever price impact it does have will be included in the new index level because if all share prices rise, the index level will also rise.”
What if the vote doesn’t pass?
Although shareholders are expected to approve the merger, if the deal were to be voted down at today’s meeting, SABMiller would remain part of the index for now. However, AB Inbev would then almost certainly launch a hostile takeover bid.
That would take more time, but if it reached a 75% shareholding, it could then de-list SABMiller and a similar process would ensue. If, however, it only reached a majority shareholding below 75%, SABMiller would remain listed.
There would still, however, be an impact on the company’s position in the Top 40 because its local free float – the amount of shares that could be freely traded on the JSE – would be lower. This would reduce its weighting.
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