S&P mulls rule change to keep Teck in Canadian benchmarks after Anglo merger

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Teck Resources Ltd. might get to stay in Canadian stock market benchmarks after all.

When the Vancouver-based miner’s US$20-billion merger with Anglo American PLC was first announced in September, institutional investors balked at Teck having to leave the S&P/TSX Composite Index and the blue-chip S&P/TSX 60 if the deal was completed.

Because the combined company, to be called Anglo Teck, would be redomiciled in Britain, the company would no longer qualify for Canadian index inclusion under S&P’s rules. But a newly proposed rule change could allow Anglo Teck to remain in Canadian indexes.

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If the deal ultimately moves ahead, the combined company will be headquartered in Canada, but its primary public listing will be on the London Stock Exchange. Secondary listings would be maintained in Johannesburg and New York and exchangeable shares would be listed on the Toronto Stock Exchange, which have the same rights as ordinary shares but with the ability to defer capital-gains taxes.

That would result in Anglo Teck joining the Financial Times Stock Exchange 100 Index, a rival to S&P’s products and part of the LSE, and Canadian investors would then have to sell roughly $2.4-billion worth of Teck shares.

Peter Miller, global co-head of equity capital markets at Bank of Montreal, said that move would make it harder for passive Canadian investors to maintain a properly diversified portfolio.

“If you think of Canadian investors, who clearly are investing more and more in passive funds like ETFs and index funds, to the extent that their portfolios are more diversified, right now they’ll be in Teck and then all of a sudden there is no Teck exposure in their portfolio,” Mr. Miller said. “That is a negative.”

Now, S&P is proposing a change to the methodology it uses to determine which companies are eligible for index inclusion.

Under existing rules, companies must be listed on the TSX and domiciled or incorporated in Canada to be included in indexes. S&P is considering expanding eligibility to any TSX-listed company that meets all other non-domicile criteria.

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Those companies would be considered “foreign issuers” and given a 50-per-cent weighting in Canadian indexes based on their total public float, according to the proposal, published earlier this month. Given that combining Anglo and Teck would create a company with roughly double the number of shares as Teck alone, the impact of adopting the proposal would be to leave Teck with a similar weighting in the Composite and 60 as it has today.

“This proposal, as it is written, is definitely geared towards addressing industry concerns around Teck,” said Peter Haynes, managing director of index products at TD Securities. “That is absolutely clear. It doesn’t say Teck’s name but you can tell that is what they are trying to do.”

Scotia Capital analyst Jean-Michel Gauthier said in a Thursday note to clients S&P would likely want to have the new rule in place by the end of September, before the Anglo Teck deal closes, though he stressed nothing was certain at this point.

“At this stage, S&P is only gathering feedback,” Mr. Gauthier wrote. “No formal consultation may arise out of this exercise. Still, we expect a great level of interest from investors.”

Even if the proposal is implemented, and quickly enough to ensure Teck remains in domestic benchmarks, Mr. Haynes raised multiple concerns over it.

“One of the most important factors in determining whether or not a stock should be included in the index is how much is it trading in the Canadian market,” he said.

Existing rules, which S&P is not proposing to change, require index-included stocks to turn over at least 25 per cent of their float in Canada every year.

“How do we know that Anglo Teck is going to have that volume? And if we keep it in the index and then six months later it doesn’t have the volume, are we going to take it out then?” Mr. Haynes asked.

Shareholders of both Anglo and Teck approved the transaction at separate meetings on Dec. 9. Canada’s federal government blessed the deal one week later, although China still needs to sign off on an antitrust review – both Anglo and Teck are major suppliers to the country – and that is not expected to happen until late this year or early 2027.

Mr. Haynes said a better solution would involve more qualitative metrics that give S&P’s index committee some subjective authority to determine whether a company can be included in an index.

“Fundamental investors are telling S&P to find a way to get Teck to stay in our benchmark,” he said. “I do commend S&P for soliciting feedback. I believe we need to find a way to deal with this type of situation, but this is not the solution.”