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The FTSE 100 can seem like a protection racket. Want in? Pay up.
Just Eat Takeaway is the latest name to face ejection from London’s top equity index, the food ordering website having been judged by compiler FTSE Russell to be Dutch not British.
Its ousting has none of the drama of that surrounded miner BHP, which last week said it plans to ditch London in favour of Sydney, nor of the fight around Unilever. Instead, the theme is protectionism by bureaucracy as FTSE owner London Stock Exchange strives to maintain global relevance.
Problems began when Just Eat agreed in January to buy US peer Grubhub in an all-share transaction. The need to smooth trading for its new US shareholders required a Nasdaq listing. That meant Just Eat backed out of a pledge given by Amsterdam-listed Takeaway when it bought the company in 2019 to use London as the stock’s primary trading venue.
Having established an alternative to London for its non-EU investors, Just Eat flagged last month that it would not reach a decision on next steps before the August 3 cut-off point for FTSE nationality review. Investors, having waited more than eight months for news on which of its three trading venues would be saved, should now expect a decision within days.
Being shooed off the London market is helpful PR for what always seemed an inevitable conclusion. Nevertheless, it’s worth remembering that the FTSE 100 will be losing its 37th biggest company by market value on a technicality.
At the heart of the story is FTSE’s subjective rules on nationality. Decisions are based on more than the location of the corporate headquarters, the listing venue and operational base. Boardroom nationalities, ownership profiles and the perception of investors all come into play. Carve-outs are available for companies domiciled in tax havens and those in developing countries where investor protections might be lacking.
One contentious aspect in the rules is the liquidity test. In short, it’s not enough for London to be the most popular trading venue; a stock must not trade too often in its country of incorporation, so long as it’s a developed market.
BATM Advanced Communications, a network equipment maker that floated in London in 1996, was told in February that it had been reclassified as Israeli because too many shares had been traded in its hometown of Tel Aviv. FTSE gave BATM 12 months grace to find a workaround, which might include a delisting in Israel or a break-up.
A less dramatic solution would be for FTSE to loosen its foreign market liquidity thresholds and accept London’s diminished influence, as reflected by a global equities market share that has shrunk from about 11 per cent at the start of the millennium to approximately 4 per cent. FTSE launched a consultation in July on the back of Lord Hill’s listings review, raising a faint possibility of reform.
How much its conclusions matter is arguable. The FTSE 100’s many limitations as a benchmark are well understood, from its reliance on overseas revenues to its overweighing of food retail, financial services and basic resources. Just $23bn in total has been invested in exchange traded funds that track the FTSE 100, according to research and consultancy group ETFGI; the Nasdaq 100 and Nikkei 225 have attracted $190bn and $169bn respectively.
The most likely outcome is for Just Eat to join the netherworld of stocks on the lower tier of the UK’s listing regime. It has become a crowded space. By market cap alone lenders Santander and AIB would be candidates for the top index, as would Wheaton Precious Metals, currency dealer Wise, miner South32, ecommerce group THG and Deliveroo, Just Eat’s smaller rival. BHP will be joining them next year.
FTSE inclusion provides the main incentive for companies to bear the extra costs and responsibilities that come with an LSE premium listing. But as it’s an increasingly irrelevant standard, the index setter’s protectionist rules of inclusion are creating an evermore distorted measure of the London market. A rethink is overdue.