Mexico Billionaire's 168% Stock Gain Fans Derivatives DebateBy
Elektra’s float fell below IPC threshold most of last year
Inclusion in index to be reviewed for September rebalancing
The best performer on Mexico’s benchmark stock gauge is coming up on a crossroads.
A decision by the exchange in coming months on whether Grupo Elektra SAB is allowed to stay on the index could help extend the rally or bring about a painful reckoning for investors.
Elektra, the retail and bank conglomerate controlled by billionaire Ricardo Salinas, has soared 168 percent since December, trouncing the other 34 stocks on the IPC, before today losing as much as 3.5 percent. The gains stem in large part from a derivative instrument the company uses that makes its shares scarce, so that investors seeking to track the benchmark index or those looking to cover short positions in the stock must compete to buy the small portion that remains.
The company has stayed on the IPC even though it has sometimes violated membership rules that require a minimum number of shares to circulate within the market, according to data compiled by Bloomberg. After waging a legal battle to stay on the index that began in 2012, an agreement between Elektra and the stock-exchange operator that allowed it to stay has expired. Now, traders are trying to figure out whether the stock could get ejected from the benchmark when it’s rebalanced in September. Some are doubtful, pointing out that Elektra succeeded in getting the bourse’s chief executive officer ousted the last time it sparred with the company about its float.
“The Bolsa sees Elektra as untouchable” and would rather turn a blind eye to the issue to avoid getting into another drawn-out legal battle, said Hector Maya, an analyst at Vector Casa de Bolsa in Mexico City. “They really don’t want to get involved.”
Roberto Gavaldon, a spokesman for exchange operator Bolsa Mexicana de Valores SAB, didn’t respond to questions on Elektra’s float or any review of its status on the IPC.
If Maya’s right, inaction by the Bolsa even in the face of rule violations could erode trust in a stock market that already suffers from a perception of lax rules enforcement by regulators, a lack of transparency and insufficient liquidity.
At the end of the first quarter, Elektra met the Bolsa’s requirement that at least 12 percent of its shares be floated after subtracting the portion tied up in swaps, according to data compiled by Bloomberg. But the float missed the target during most of last year and has varied from as low at 7.8 percent to as high as 20 percent since the beginning of 2014.
“Elektra complies with all legal requirements and norms of the Mexican Stock Exchange to be publicly listed and be included in the IPC,” said company spokesman Dan McCosh. “Using the new methodology, since September 2016 Grupo Elektra has consistently met quarterly criteria for inclusion in the IPC and the company would expect to do the same in the annual rebalance.”
Including the shares tied to derivatives, Elektra says its float is 26 percent.
That disagreement on how to calculate the float goes back to 2012, when the Bolsa put in place new index eligibility rules. They specified that shares withheld from trading because they’re held as a hedge in a derivative contract would be excluded when determining whether a company met the float minimum. Luis Tellez, the Bolsa’s chairman and CEO at the time, had argued that the formula would guarantee companies had enough shares in the market to ensure liquidity.
Elektra, arguing that the derivatives don’t immobilize its shares, went to court and persuaded a judge to grant an injunction against the change, forcing the stock exchange to use an older methodology when determining the size of its float. In 2014, it reached a deal with the stock-exchange operator: Elektra could stay on the IPC index at least until 2016 and Tellez would resign.
But that agreement expired in August of last year, and the Bolsa hasn’t publicly announced any concern about Elektra’s float. The company’s equity swaps let it bet on its stock price as if it held the shares itself. In such agreements, another party typically buys up shares as a hedge, which has the effect of making Elektra shares scarce.
The surge in Elektra this year has caught the attention of AMIB, Mexico’s brokerage association, which is planning to approach the banking and securities regulator with concerns about how the IPC is calculated, according to a person familiar with the matter, who asked not to be identified because plans are still being finalized.
At the end of last year, Salinas and his family had a stake of more than 74 percent in Elektra, with the remaining 26 percent in the hands of outside investors, according to the company’s annual report. At the time, it had 10.15 billion pesos ($534 million) worth of equity swap derivative contracts tied to its stock price. That represented almost 17 percent of the company’s shares, according to data compiled by Bloomberg and company filings. Subtracting the portion of shares tied up in the derivatives from the portion that isn’t already held by the family, Elektra would have had a float of just 9.1 percent.
In its 2016 annual report, Elektra acknowledged the agreement had expired and pointed out that it’s still part of the IPC index. Elektra reiterated its view that the derivatives don’t immobilize its shares.
“I’m sure the Bolsa just doesn’t want a repeat of the same litigation that they experienced the first time around, or maybe it’s not a top priority,” said Kristina Garner, a Bahamas-based research analyst in the global core equity group at Invesco Ltd. “I would’ve thought that at least, even from the company’s standpoint, they’d be working to renegotiate or extend the agreement that was originally met.”
— With assistance by Carlos M Rodriguez, and Crayton Harrison
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