Shareholders aren't the only ones who will benefit from the takeover and delisting of the Bellamy's Australia Ltd (ASX: BAL) share price. It seems that EML Payments Ltd (ASX: EML) is also set to be a winner from the transaction.
The removal of Bellamy's from the S&P/ASX 200 (Index:^AXJO) (ASX:XJO) index will leave a circa $60 million hole in the market that will need to be filled and EML is expected to be the replacement candidate.
EML to get chunk of the $58 million fund flow
"S&P Dow Jones Indices announced that it will remove Bellamy's Australia Limited (BAL) from all S&P/ASX Indices, subject to final court approval of the scheme of arrangement whereby the company will be acquired by China Mengniu Dairy Co.Ltd," said Morgan Stanley.
"EML Payments Limited (EML) will replace Bellamy's Australiain the S&P/ASX 200 Index with an estimated index weight of +7 bps [basis points].
"We estimate passive demand to be approximately A$58 mn in value to trade with 13 mn shares to be traded, or 4 days to cover (DTC)."
Why index changes impact on ASX shares
The stellar rise of index-hugging exchange traded funds (ETFs) means that changes to key market indices are having a bigger influence on the performance of a stock. For instance, if an ASX-listed company is added to the S&P 200, passive funds will be forced to buy the stock and that drives up demand.
The same is true for ASX shares that get dumped from an index – unless it's due to a takeover like in Bellamy's case.
While some don't believe there is such a clear-cut link between a stock's performance and index changes, I've seen research that shows a correlation between the two. The impact may not be so obvious in the short-term after S&P announces the change, but ASX shares that are added to a key benchmark have a tendency to outperform over a six-month period, if not longer.
Stocks to watch in 2020
While the EML share price is pulling back sharply this morning with a 4.5% tumble to $4.28, the stock is trading close to a record high and has nearly tripled in value since January.
Mind you, EML won't be absorbing all the investment capital from passive investments. The index weighting on mining contractor NRW Holdings Limited (ASX: NWH) will be increased by 7bps as a result of Bellamy's sale.
The changes take effect from tomorrow and that bodes well for both EML and NRW in 2020.
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