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Elektra Drops Most Since ’97 as IPC Cuts Illiquid Stocks

Grupo Elektra SA, the retail and banking firm controlled by billionaire Ricardo Salinas, fell the most in 14 years after stock-market rule changes threatened its position on Mexico’s benchmark IPC index.

The stock plunged 18 percent to 1,035.92 pesos at the close of trading, the biggest decline since Oct. 27, 1997, when the Asian financial crisis sparked capital outflows from emerging-market countries. The slide wiped out 53.7 billion pesos ($4.1 billion) from Elektra’s market value, leaving it at 251 billion pesos. The IPC rose 0.5 percent today.

Elektra more than doubled last year, in part because a derivative instrument owned by the company made its shares scarce. The stock exchange’s new rules, announced last night, prevent shares that are tied up in a company’s derivative transactions from being included when calculating whether the public float reaches the minimum level of 12 percent of equity.

“It’s a positive move by the index to put this rule into play,” Ed Kuczma, who helps manage $33 billion including Mexican shares at Van Eck Associates in New York, said by phone. “Elektra had pretty low free float and its weight in the index probably wasn’t representative of its true impact. Investors have a tough time getting exposure to this name just through the free float.”

The rules take effect in September. While Elektra’s float is 29 percent according to the current rules, the derivative has made only about 6 percent available for trading, Julio Zamora, a Citigroup Mexico strategist, said in a Jan. 4 report.

Equity Swap

“If everything is as it appears at the moment, it’s very probable that it will leave the index,” said Luis Rodriguez, director of research at Casa de Bolsa Finamex SAB in Guadalajara, Mexico. “All the funds that replicate the index are going to cut their positions.”

Elektra’s derivative instrument is an equity swap, which allows the company to bet on its stock price as if it held the shares itself. In such transactions, the other party normally buys up shares as a hedge, a process that would have made Elektra shares scarce.

The goal of the swaps is to get an “attractive potential return” from underlying assets the company estimates are undervalued, Elektra said in a statement filed with the exchange today.

Dan McCosh, a spokesman for Elektra, declined to comment further.

Share Shortage

A shortage of shares for an IPC stock drives up the price, as funds indexed to the benchmark generate disproportionate demand, said Aldo Miranda, a trader at Intercam Casa de Bolsa SA, who recommends selling Elektra shares.

“It’s a very good thing for the market,” Miranda said in a phone interview from Mexico City. “They’re trying to make sure that what happened last year doesn’t happen again,” he said, referring to the surge in Elektra’s stock.

The Bolsa said in a statement that it wants to identify “shares of companies that, by virtue of an action or legal contract they participate in, have the effect of restricting their availability for trading in the market.”

Shares of Bolsa Mexicana de Valores SAB, which operates the exchange, climbed 2.1 percent today, extending their gain this year to 20 percent.

The adjustments “respond to a constant analysis and improvement of the indexes we produce,” Luis Tellez, chief executive officer of the exchange, told reporters today in Mexico City.

2012 Decline

With today’s drop, Elektra shares have fallen 27 percent from their peak of 1,425.82 on Jan. 4. The stock rallied 173 percent rally between Dec. 31, 2010 and Jan. 4 of this year.

Mexico City-based Elektra’s shares closed at 1,258.08 pesos yesterday, trading at a price to earnings before interest, taxes, depreciation and amortization ratio of 37, making it the most expensive stock on the Mexican exchange. After trading today, the ratio fell to 34, the second highest level after Minera Frisco SAB, a mining company controlled by billionaire Carlos Slim. The IPC index trades at a ratio of 6.4 times Ebitda, as the profit measure is known.

“The index is doing a good job of trying to address some of the issues that both local and international investors have had with the methodology,” said Kuczma of Van Eck. “Having a proactive approach is probably the best thing for them.”

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