Espirito Santo’s Disgrace Saddles PSI 20 With Vacancies

Portugal’s PSI 20 Index will probably be stuck with just 18 stocks for a while.

Going by its own criteria, Euronext NV is virtually out of candidates to replace Banco Espirito Santo SA and parent company Espirito Santo Financial Group SA. The stocks were removed from the PSI 20 as the Espirito Santo empire crumbled and the central bank took over what was once Portugal’s biggest publicly traded lender. The only company big enough to join the measure is a takeover target that analysts say will be barred.

“We’re convinced that the main Portuguese stock-market index will continue to count on just 18 companies,” Joao Lampreia, an analyst at Banco de Investimento Global SA in Lisbon, said in an interview. “Even hospital operator Espirito Santo Saude, which could meet the criteria, should not be an option as it has become a takeover target. The PSI 20 Index is becoming smaller, less liquid and less visible for stock investors. This is negative.”

The downfall of the Espirito Santo Group, a family-controlled network of businesses with several units under creditor protection, is taking a toll on Lisbon’s benchmark index. To be considered for admission to the gauge, publicly traded companies need to make available more than 15 percent of their shares with a market value of at least 100 million euros ($132 million), according to Euronext rules. The index can have between 18 and 20 members, the exchange says.

Bank Downfall

Euronext removed Banco Espirito Santo from the Portuguese index this month and its parent in July. The nation’s central bank took control of the lender in a 4.9-billion-euro bailout at the beginning of August, after at least three companies tied to it requested protection from their creditors. When the PSI 20 hit an almost three-year high in April, Banco Espirito Santo had the second-biggest weighting in the index, and Espirito Santo Financial Group accounted for 1.9 percent of it, data compiled by Bloomberg show.

The exchange will announce the results of its quarterly review at the beginning of September, a Euronext spokeswoman in Lisbon said. It may allow companies with available shares valued at less than 100 million euros, according to Euronext’s rules.

While Espirito Santo Saude SGPS SA, another Espirito Santo Group company, would fit the criteria to enter the PSI 20, it has received a takeover approach, probably barring it from admission, according to Lampreia and Diogo Teixeira of Optimize Investment Partners in Lisbon. The stock jumped to a record this month after the hospital operator received a preliminary bid from Mexican competitor Grupo Angeles Servicios de Salud SA.

No Sense

It wouldn’t make sense to add Espirito Santo Saude to the PSI 20 if it then needs to be removed following an acquisition, Teixeira said. The company is the only one outside the PSI 20 that otherwise meets all of Euronext’s criteria, according to data collected by Bloomberg and analysts.

“We’ve reached a point where there are no more candidates to enter the PSI 20 Index because the only candidates are either too small or have become takeover targets,” said Teixeira, the chief executive officer of Optimize. His firm manages 90 million euros and sold almost all of its Portuguese equities in the first two weeks of July, he said. “This is negative for Portugal’s PSI 20 Index, which is increasingly becoming less liquid and less attractive for institutional investors.”

Banco Espirito Santo’s downfall helped the PSI 20 slump 31 percent from its high in April to a 13-month low on Aug. 12. Even after rebounding 10 percent since then through yesterday, it remains this quarter’s worst performer among 24 developed-market indexes tracked by Bloomberg.

“It’s likely that the PSI 20 will remain with just 18 companies,” said Raul Povoa, who helps manage the Alves Ribeiro Medias Empresas Portugal, a fund that invests exclusively in Portuguese stocks. “I don’t see any other companies eligible to enter the main index at this moment.”

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