Unilever's FTSE Membership Is at Risk in Structure Overhaul

(Bloomberg) -- A lot of investor money could be at stake if Unilever packs up and moves its headquarters out of Britain.

The company’s decision to consolidate its head office in the Netherlands and abandon a U.K. base it has maintained for nearly a century may mean Unilever will no longer be eligible for inclusion in FTSE indexes. The maker of Marmite spread and Lipton tea is the third-largest component of the U.K.’s benchmark FTSE 100 Index by market capitalization.

In a statement announcing the proposed simplification, Unilever said the process may result in it being designated under only one index nationality. The company will begin discussions with major index providers to determine how they will treat it after the new structure is complete, and will continue to list its shares in both countries, as well as in the U.S.

While a spokeswoman for FTSE Russell declined to comment, a publicly available factsheet on the FTSE index series outlines some stipulations for companies incorporated outside the U.K. If a firm is incorporated in a developed country other than Britain and is listed in that country and in the U.K., FTSE will normally only assign U.K. nationality if the company fails FTSE’s liquidity tests in its country of incorporation, passes the liquidity tests in the U.K. and liquidity is higher in the U.K. than in any other country.

Unilever noted Thursday that its NV shares trade with greater liquidity than the Plc shares. Chief Financial Officer Graeme Pitkethly said during a conference call it would be ideal for Unilever to retain membership in both the FTSE 100 and the Dutch AEX Index. The company will inquire about inclusion in the FTSE 100, he said, but the ultimate decision lies with the providers.

Without U.K. incorporation and with greater liquidity in Amsterdam, U.K. index exclusion seems likely, Societe Generale analysts including John Carson wrote in a note. Such a move could benefit FTSE World indexes, the Dutch AEX Index and a gauge like the Euro Stoxx 50 Index as a result of increased representation, according to Carson. The U.K. location of two of Unilever’s operational headquarters could serve in favor of retention, the analysts wrote, but the main base in the Netherlands should prove more relevant.

“A lot of U.K. local investors would be sad to see Unilever disappear from their portfolios,” said Chris Beauchamp, a market analyst at IG in London. “It would be in everyone’s interest for them to stay in the FTSE. If not, it would spur quite a bit of hunting for replacements, but everything else would be second best.”

Still, City Index’s Ken Odeluga says that an exclusion from the FTSE would likely only bring short-term disruption for Unilever investors with an obligation to hold just benchmark shares.

“Most of its institutional investors are not bound by such obligations, and in any case, historically, the delisting of significant capital from major indices rarely results in lasting impact to individual shares or the index,” Odeluga, an analyst at the firm, said in emailed comments.

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