A new era for the FTSE indices

Recent changes to the UK’s stock market listing rules should lead to a host of new names joining the FTSE 100 and FTSE 250 indices in the new year. This should generate more interest in the UK stock market and put more companies on the radar of investors.

This matters to investors whether they own UK stocks directly, have exposure via actively managed funds or simply track certain parts of the market through an exchange-traded fund or index fund.

You won’t have to wait too long before the changes start feeding through. Four companies that previously didn’t qualify for FTSE indices have already laid the groundwork to change their listing category – these are Coca-Cola Europacific Partners, Deliveroo, Oxford Nanopore Technologies and THG.

In doing so, they should join the top tiers of the UK market and this could be the trigger for more ‘ineligible’ companies to follow suit and find a way into the FTSE. The Coca-Cola bottling company is big enough to join the FTSE 100 while Deliveroo, Oxford Nanopore and THG would comfortably slot into the FTSE 250.

There are multiple benefits to being part of either index. Tracker funds mirroring the performance of the FTSE 100 or FTSE 250 will buy the shares, stocks and shares liquidity could improve, being a member is a badge of honour for companies, and these businesses will become more visible to investors. Consumers are likely to see more media commentary on these companies too, which raises brand awareness.

Get ready for more IPOs

More IPOs are expected to happen as a result of the simplified listing regime, and some of these new names could soon join the FTSE 100 or FTSE 250 indices. This would provide a much-needed boost to the UK stock market which has been losing countless companies to takeovers in recent years and has not replenished the pot with enough flotations.

A lot of companies will have been waiting for political stability in the UK before proceeding with a stock market flotation as the past eight years has brought with it a lot of twists and turns, particularly the short-lived Liz Truss era.

With the general election now done and dusted, a big uncertainty has been removed in the eyes of company bosses and this should lead to more stock market flotations. Advisers and lawyers imply there is pent-up appetite for IPOs but that preparations to list a company can take months, hence why a surge in stock market listings is more a story for 2025 than this year.

Paddington to the rescue?

The first fruits could emerge before Christmas. The simplified listing regime was designed to attract more companies to the UK stock market and this action, together with a more stable political backdrop, could see one of the biggest UK IPOs in years.

Pay TV service-to-film production group Canal+ is expected to float on the London Stock Exchange on 16 December as part of a demerger from Vivendi. It is expected to be worth around £6.7 billion at listing which is big enough for the FTSE 100 but there is a technicality which prevents it from inclusion in the UK’s blue-chip index.

Its IPO prospectus states that the company will not adhere to the UK Takeover Code which means it won’t qualify for FTSE indices. The Bollore family is expected to own 31.04% of Canal+ when its shares start trading in London. The Takeover Code requires a party owning more than 29.9% to bid for the whole group, but Canal+ says neither the UK, nor the French, or any other equivalent takeover regime will apply to the company. That means the Bollore family won’t have to bid, but the price is giving up inclusion in FTSE indices.

That’s a shame because Canal+ could be a big hit with investors if the valuation is attractive and it communicates a compelling strategy on how it intends to grow on a standalone basis, freed from the shackles of being owned by a media conglomerate. Nevertheless, investors will still be able to buy the shares if they wish, even though it won’t qualify for the FTSE.

The IPO is timed to happen just after the release of the latest Paddington film, a hugely successful franchise produced by Canal+’s StudioCanal arm. If Paddington in Peru cleans up at the box office, there might be a queue of investors eager to put a slice of the producer in their ISA or pension.

Investors in the UK stock market should be familiar with the sector thanks to listed companies past and present. The London Stock Exchange has featured quite a few TV and film-related companies over the years, including film and TV producer Entertainment One, broadcaster-to-studio production business ITV, film studio owner Pinewood, production vehicles provider Facilities by ADF, and Zoo Digital, which provides subtitles for big film and TV studios.

What are the new requirements to qualify for FTSE indices?

Historically, London-listed companies needed a premium category listing to qualify for FTSE indices. Now they need ESCC (Equity Shares Commercial Companies), a new category created in July by merging the premium and standard listing categories.

All companies that previously had a premium listing were automatically switched to ESCC. Standard listing companies were transferred to a new ‘Transition’ category and they have to apply to switch to ESCC.

To qualify for the ESCC category, companies must be worth at least £30 million; they must comply with the UK Corporate Governance Code or explain why they don’t comply in their annual report; and they must offer pre-emption rights to shareholders, among other factors.

Deliveroo has already completed the move to the ESCC category, Oxford Nanopore is targeting transfer on 6 November, Coca-Cola Europacific Partners should make the switch on 15 November, and THG hopes to transfer by March 2025.

All of those changes (apart from Deliveroo) will happen too late for the next quarterly FTSE reshuffle as the cut-off date for qualification is 31 October 2024. That means we’re looking at the March 2025 review to start reflecting changes to the listing regime. The indicative change list is normally published in mid-February.

It's also worth noting that Applied Nutrition recently floated on the London market. It has an ESCC listing and its £358 million market value might be enough to see it scrape into the FTSE 250 at the next reshuffle, although it is right on the cusp between this index and the FTSE Small-Cap, so where it ends up will depend on market movements up until the cut-off point of 22 November.

Quite a few companies in the Transition category have not publicly commented on whether they will move to the ESCC, including money transfer group Wise, which is big enough for the FTSE 100. The Transition category is expected to be an interim status and there is the potential for the FCA to scrap it down the line.