BREAKINGVIEWS-Unilever-FTSE standoff is test of index power

(The author is a Reuters Breakingviews columnist. The opinionsexpressed are her own.)

By Carol Ryan

LONDON, March 28 (Reuters Breakingviews) - Unileverholds the upper hand in a standoff with the FTSE 100.Index provider FTSE Russell must decide whether the Marmitemaker can remain in Britain’s blue-chip benchmark after it optedfor a Dutch base in March. Recent tax changes and activistpressure may lead to similar rejigs at heavyweights Shelland BHP . That strengthens the case forbeing flexible.

The FTSE’s Nationality Advisory Committee has to weighwhether the Anglo-Dutch consumer group still qualifies for UKnationality – a prerequisite for inclusion in the FTSE 100 index– despite choosing Rotterdam as its global head office. If not,the company led by Paul Polman will relinquish the spot in theindex that it has held for over 30 years. Funds which track thebenchmark will be forced to sell.

The committee has been flexible before: British Airwaysowner IAG and travel company TUI are members of theFTSE 100 despite being incorporated in Spain and Germany,respectively. TUI, however, had to give up its placein Frankfurt’s MDAX index to keep its London berth.

Unilever has less need to make concessions. Most UK equityfunds are now permitted to allocate a proportion of their assetsto overseas stocks, which means many can hold on. At seven timesTUI’s index weighting of 0.34 percent, the maker of Hellman’smayonnaise and Knorr soup also has greater clout.

A tough line would risk tying FTSE Russell’s hands. Activistinvestor Elliott Advisors is pushing BHP to collapse its own“Siamese twin” corporate structure in favour of an Australianparent company. Doing so would put the miner’s FTSE 100membership in doubt. And the Dutch government’s recent decisionto scrap its dividend withholding tax may prompt Shell,headquartered in The Hague, to reconsider its costly dual-classshare structure.

Together, the three companies count for more than 14 percentof the FTSE 100’s weighting. To justify keeping Unilever in thebenchmark, the index provider may have to turn to subjectivefactors like investor perceptions and the company’s historicallinks to the United Kingdom. That’s not ideal for the index’sbrand. The alternative, however, is that the FTSE 100 risksbeing diminished.

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CONTEXT NEWS

- Unilever’s two holding companies will become a singlegroup incorporated in the Netherlands, the company announced onMarch 15.

- The consumer goods company said that its continuedinclusion in the FTSE 100 index still has to be determined.Unilever is beginning discussions with the major index providersto determine how they would treat the new company structure.

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(Editing by Peter Thal Larsen and Bob Cervi)