Buying shares in a company ahead of an index re-weighting is rarely a good idea but that hasn’t stopped brokers pushing Glencore ahead of November 24th – the day the lock-up agreement with cornerstone investors expires.
Citigroup has even created a timeline.
(Click to enlarge).
Citi estimates Glencore’s free float will move from 11.7 per cent to 16.8 per cent on that date and trackers will be forced to buy around £264m of stock.
The lock-up of cornerstone investors is expiring on 24th November; we expect FTSE and MSCI to change the weighting at their respective index review dates ( 30 Nov for MSCI & 16 Dec for FTSE) and this could create passive buying of around 59.3m shares, which is relatively small against the cornerstone investor shares of 362m.
However, not everyone agrees with those figures. Traders reckon FTSE and MSCI will continue to weight the trading house at 20 per cent of its market capitalisation until May – the one year employee lock-up expiry. Only then will there be the possibility of a squeeze.
At that point, it’s estimated, a further 36.1 per cent of the company will qualify for index weighting. That will take the free float up to 53 per cent and under FTSE rules (depending on proposed changes) could take Glencore to a 75 per cent market cap weighting.
Whichever view you take, Glencore’s weighting in the FTSE 100 is going to grow by 500 per cent between now and May. And that should provide a powerful prop for the share price, claims Liberum Capital.
If you take the example of a large tracker fund which is c.4% of the FTSE today, the fund would need to own 3% of Glencore (4% x 0.75 weight). However, they would be attempting to execute that from an available free float of just 53%, so they are essentially trying to buy 6% of the available free float – and that is just one index fund. The real deal comes with active managers, who today can easily afford to ignore Glencore altogether but will no longer ignore it in the near future. Its current weight of 11.7% equates to just 0.25% of the FTSE. By May 2012 the weight will be 75% of a £30bn company, equivalent to a £22.5bn company.
Of course, it’s impossible to know when the trackers and active managers will start buying, so the idea of trading around the re-weight is kinda of academic.
Liberum again.
On or about 24th November, we believe Glencore’s heralded technical squeeze will commence. The squeeze will come in two distinct phases but we believe once the first squeeze occurs, the second will become better understood and therefore will be partially priced in, Thus we see rationale to buy the shares now and sell at the point when the second squeeze is priced in (in all probability before May 2012)
But all of this helps explain why some big investors in London have been lobbying to have the free float rules on new listings changed.
Related links:
FTSE asks the free float question – FT Alphaville
If we ran the FTSE 100… – FT Alphaville