Time Warner, AOL & Others See Index Fund Activity (RBC, ALGT, AOL, TWX, AVCT, EMR)

Standard & Poor’s is making several index changes in the coming trading days.  While Regal Beloit Corp. (NYSE: RBC) and Allegiant Travel Co. (NASDAQ: ALGT) are moving up in the S&P Indexes, the big S&P decision is around the AOL Inc. (NYSE: AOL) spin-off from Time Warner Inc. (NYSE: TWX).  Other companies directly or indirectly affected in these changes are Avocent Corp. (NASDAQ: AVCT), and Emerson Electric Corp. (NYSE: EMR).  Our take on this is what it means for the amount of buying and selling from index funds.

Regal Beloit Corp. (NYSE: RBC) is moving up out of the S&P SmallCap 600 and will replace Avocent Corp. (NASD:AVCT) in the S&P MidCap 400.  Moves of this nature for Regal Beloit create very little added buying by S&P index-tracking funds.  Avocent is being acquired by Emerson Electric Corp. (NYSE: EMR), an S&P 500 constituent, in a tender offer expected to be completed soon pending final approvals.  Because Emerson is about 30-times the size of Avocent, this sort of index weighting change from index-tracking funds is just too small for us to even care about.

Allegiant Travel Co. (NASDAQ: ALGT) will be a new member of the S&P Small Cap 600 Index and will replace Regal Beloit in the index after the close of trading on Tuesday, December 8.  Allegiant is up 2.7% on only 250,00 shares.  It looks likely that more shares will need to be purchased based upon a $866 million market cap.

AOL Inc. (NYSE: AOL) is still trading as a when-issued stock but it will replace Imation Corp. (NYSE: IMN) in the S&P MidCap 400 after the close of trading on Wednesday, December 9.  Imation had a market capitalization of less than $325 million, under the minimum requirements for a mid-cap constituent.  Index sellers already have taken almost 4% out of the Imation price based upon index selling pressure as the entire weighting will be dumped.

Time Warner Inc. (NYSE: TWX), a S&P 100 and S&P 500 constituent, is spinning off AOL to shareholders on or about that date on a 1 for 11 share tax-free dividend basis.  Time Warner will remain in both the S&P 100 and S&P 500 indices. Fractional shares will be sold off and that cash will be distributed, but the tax portion is considered taxable. The exact market cap for AOL is not yet known as it trades on a when-issued basis.  That figure is north of $2.5 billion and is not deemed to be north of and is not more than $3.3 billion based on average comparisons.

The bad news is that AOL not going into the S&P 500 Index will create some mandatory S&P 500 Index benchmark fund selling in shares of Time Warner.  But the good news is that this will likely be far less index selling compared to many other key spin-offs.

Our calculations for what the real translation of index trackers differs from others because we have discussed with S&P analysts about their own interpretations of index trackers.  Based upon a conversation we had and assuming the market remains stable, we would expect only about 10 million Time Warner net shares over the coming days to have to be absorbed, and that figure will be easy to be absorbed as the indexers have a week before the formal change.  Any additional shares that need to be sold won’t have to be immediately sold as most funds have looser buy and sell policies on index changes.

JON C. OGG