Forward Curve in Contango?, page-6

"In the spirit of balanced discussion, of which I know you are a fan.. I will just note that there is soon to be an approx 900m units being issued to the BHP shareholders for the deal. As un-natural holders, these BHP owners may decide to discard these WPL shares in order to reinvest back into BHP (or whatever else they want to own). As such I have left some room to increase my weighting in WPL. If the train leaves the station without me, I won't be too upset as I have gained target exposure in another energy play"


Sure, but to re-balance your balanced offeriing, bear in mind that those extra 900m WPL shares to be issued to BHP shareholders will significantly add to WPL's market capitalisation and hence, increase its weighting in the various equity indices of which it is a member, so there will be meaningful induced buying of the stock by Index funds which, as you know, are not mere bit players in the market these days.

At the time of the merger announcement I read some work conducted by the quant team at UBS (or Citigroup, I can't recall which, and I regret not preserving a copy of the analysis), which concluded that the stock flow-back from the higher indexation impact will, in fact, in all probability be greater than the assumed net selling by BHP shareholders.

So, yeah, there might be some sticker shock selling on the day it goes ex- completion of the merger, but its likely to be muted and certainly short-lived, so I wouldn't bank on it providing a meaningfully cheap entry point.

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