BSkyB biggest casualty of FTSE index reweighting

British Sky Broadcasting is set to be the biggest casualty when FTSE International, the index provider, announces a reweighting of the UK indices this morning.

British Sky Broadcasting is set to be the biggest casualty when FTSE International, the index provider, announces a reweighting of the UK indices this morning.

FTSE is changing the way it calculates indices such as the FTSE 100, so less weight is given to companies with a small free float, where many of the shares are held for the long-term by strategic investors, parent companies or directors.

Around 60 per cent of BSkyB shares are tied up with investors unlikely to sell, including almost 40 per cent with Sky Global Networks, the umbrella company for Rupert Murdoch's satellite interests.

The changes will not come into effect until next June, giving fund managers time to adjust and to reduce the market impact of the sell-off that firms such as BSkyB will experience. Tracker funds, which replicate the index, will have to dump 60 per cent of their BSkyB stock.

Graham Colbourne, director at FTSE, said fund managers requested the change in response to the growth of tracker funds and the trend towards partial flotations.

Anomalies occur if only a small proportion of a company's equity is being offered for sale. If BT were to sell, say, just 20 per cent of its BT Wireless unit, tracker funds anticipating its inclusion in the FTSE 100 would be forced to buy most of the available stock. That extra demand would mean all investors paying a premium to the underlying value of the business.

Analysts argue the technology bubble of last winter would have been less severe if free float-adjusted weighting had been used by FTSE. Strong demand for tech stocks with low free floats pushed shares higher and boosted the company's weighting in the index. That created even more demand from tracker funds which were forced to increase their holdings.

"Passive fund managers are particularly keen because it means they are not scrambling after stock that is not there," Mr Colbourne said.

Since last summer, newly listed companies have been added to the index in proportion to their free float. Today's FTSE announcement will be scrutinised by fund managers anxious to learn the extent of the reshuffle they will need to make to their portfolios when the new rules are applied. Rival index provider Stoxx changed its pan-European indices to a free float-based calculation earlier this month. That prompted a big switch into UK equities from continental markets, where governments still hold large chunks of privatised utilities.