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UK holdings of Shell far too low

Financial Times: UK holdings of Shell far too low

Tuesday 28 June 2005

By Tony Tassell, Tom Catan, Ian Bickerton, James Boxell and Sundeep Tucker,

UK institutional shareholders still need to buy billions of pounds worth of shares in Shell to pump up their exposure to the oil major following its planned merger with Royal Dutch.

Holdings are far below what would be required to match the enlarged market weighting of a combined Royal Dutch Shell.

The merger has to be approved by Shell and Royal Dutch shareholders at their annual meetings today. It is widely seen as the potential trigger for one of the biggest shake-ups of the London market since Vodafone took over German rival Mannesmann in 2000.

If it goes ahead, the full market capitalisation of both companies would be fully reflected in UK indices such as the FTSE All-Share and FTSE 100 for the first time, so fund managers who aim to mirror or closely track UK indices will have to lift their holdings of Shell sharply and sell other shares.

In addition, many fund managers appear to be struggling with the complexities of the merger, particularly the creation of two types of shares for the combined group – “A” shares for Royal Dutch stock and “B” shares for Shell.

A Merrill Lynch survey of the UK’s top 50 fund managers shows they have increased their holdings in Shell since the merger was announced last October from about 104 per cent to 113 per cent of its market weight – a company’s share of a market index based on market capitalisation.

But this is far below what would be required for fund managers to hold a market weighting in the combined group.

Merrill estimates that Shell’s weighting in the FTSE 100 would rise from 3.9 to 9 per cent, which is expected to trigger a wave of buying by UK fund managers.

Alex Yipsilanti, an equity derivatives strategist at Merrill, said UK index-tracking funds alone were likely to buy about £7.4bn of Shell to raise holdings to market weight after the merger is scheduled to take effect in July.

Buying by more active funds that “hug” the indices could bring the total to more than £22bn. This would be offset by selling about £5.6bn from trackers of pan-European indices.

The index shake-up has been one factor in Shell’s outperformance of the UK market and its rival BP. Shell shares have risen 21.24 per cent since the deal was announced, outperforming BP by 9.93 per cent and the FTSE 100 by 11.61 per cent.

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