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Ricardo Salinas, Grupo Elektra SA (ELEKTRA*)’s chairman and controlling shareholder, is fighting a losing battle to support the stock amid a 59 percent tumble this year.
Elektra, a Mexico City-based retail and banking group, plunged 12 percent in the past two days to 569.75 pesos, extending its slide from a record high on Jan. 4, after MSCI Inc. (MSCI) said it will remove the stock from its global indexes at month-end. Elektra has used its new brokerage unit to buy back shares at above-market prices over the past four weeks, slowing the tumble in Mexico’s worst-performing stock, data compiled by Bloomberg and the stock exchange show.
The company traded at least 1.13 million of its shares, participating in transactions that accounted for 31 percent of volume, through brokerage Punto Casa de Bolsa since it began operations April 18, according to the data compiled through yesterday. While Securities and Exchange Commission guidelines prevent most U.S. companies from dominating their own trading, Mexico sets no such parameters.
“For all they try to support it, the sellers are creating significant outflows,” said Aldo Miranda, a trader at Intercam Casa de Bolsa SA in Mexico City. “They can’t get in front of the train.”
Elektra accounted for more than 50 percent of the purchase volume on four separate days, using Punto almost exclusively since it opened, the data show. The transactions occurred in the month before the value of Elektra’s tradable shares sank below the level required by the exchange to remain in the benchmark IPC index, according to data compiled by Bloomberg and Citigroup Inc. estimates for the company’s floating shares.
“The purpose of Grupo Elektra’s buyback fund is to provide liquidity to the market and to stabilize Elektra’s stock price on the upside as well as the downside,” Bruno Rangel, investor relations officer for the company, said in an e-mailed response to questions. “Elektra’s buyback fund does not execute trades at above-market prices. It is just one additional player in the market.”
Rangel said Elektra’s trades adhere to the country’s laws.
Jose Abraham, Punto’s chief executive officer, said in an e-mailed response to questions that Elektra “is just one more client, always instructing trading operations, in accordance with a solid code of ethics.”
Carlos Lopez-Moctezuma, a spokesman for the National Banking and Securities Commission, the country’s securities regulator, said the company is operating within the confines of Mexico’s rules.
“We don’t have any reason at this moment to think that there’s something in the regulations that they’re not complying with,” Lopez-Moctezuma said in a telephone interview from Mexico City.
Jorge Alegria, head of markets and information at the stock exchange, declined to comment.
This year’s stock plunge halts a four-year, 326 percent rally that analysts at banks including New York-based Citigroup (C) and Mexico City-based Intercam say was sparked by a derivatives trade that Elektra has disclosed in annual reports since at least 2001. The company’s 165 percent surge last year was the biggest among all 817 stocks on MSCI’s benchmark emerging-market gauge as the swaps program made the shares scarce.
“The stock isn’t moving because of fundamentals but because of flows,” Gerardo Roman, a trader with Corp. Actinver, the nation’s second-biggest brokerage by accounts, said in a telephone interview from Mexico City. “If those flows disappear, obviously the price would drop.”
Elektra traded at more than double the price-to-earnings ratio for the IPC index at the close of trading today, with a ratio of 14.1 times trailing earnings, leaving out interest, taxes, depreciation and amortization.
The rally ended when Mexico’s stock exchange unveiled new rules for IPC (MEXBOL) index eligibility on April 11, saying shares tied up in a company’s derivative transactions will no longer be counted as part of the minimum 12 percent free float required. Companies whose float is above 10 billion pesos ($722 million) are exempt from the rule.
Julio Zamora, an analyst at Citigroup in New York, estimates 6 percent of Elektra’s shares are available for trading, with 23 percent tied up in the derivatives contract and 71 percent controlled by Salinas. At today’s share price, 6 percent is the equivalent of 8.3 billion pesos, down from 18.3 billion pesos on April 11. The exchange is slated to next rebalance the IPC in September.
Elektra, which doesn’t hold quarterly conference calls with investors, reported in its 2010 annual report that it held an equity swap involving 56 million shares. The company didn’t provide a figure for the shares involved in the swap in its 2011 report.
Elektra’s “preliminary estimates” indicate it will stay in the IPC, Rangel said. The company doesn’t know how many shares its counterparties hold in the swaps because those parties “freely decide how many shares to have in order to hedge those contracts, in the proportion they want,” he said.
The equity swap contracts, which allow Elektra to bet on its stock, have made the company’s earnings dependent on market swings. Elektra recorded a 7.08 billion peso writedown on the derivatives in the first quarter as the stock tumbled, saddling the company with a 3.83 billion peso loss in the period even as sales surged 35 percent. Last year’s rally led Elektra to post an almost fivefold increase in fourth-quarter profit to 11 billion pesos.
A derivative is a contract between two parties linked to the future value or status of the underlying asset to which it refers, including interest rates or the price of stocks or commodities.
Since its April 18 opening, Punto Casa de Bolsa has made seven purchases of Elektra at a premium of 3 percent or more to the price paid by the previous buyer. No other brokerage carried out more than three transactions at such a big premium on stocks in the benchmark IPC index during that time, according to data compiled by Bloomberg through yesterday.
At 11:35 a.m. on April 20, Punto executed a purchase order at 920 pesos for Elektra shares, a 4 percent premium to the price paid in a transaction less than one minute earlier. The stock ended the day down 1.7 percent at 908.72 pesos after earlier falling as much as 6.1 percent. At 10:39 a.m. on April 26, Punto made a purchase order at a 3.3 percent premium to the price paid 11 seconds earlier, the data show.
Punto has almost exclusively traded shares in Elektra and Mexico City-based TV Azteca SAB (AZTECACP), which is also controlled by Salinas, who has a net wealth of $10.8 billion, according to the Bloomberg Billionaires Index. Non-Salinas companies accounted for less than 0.1 percent of Punto’s transactions, according to data compiled by Bloomberg.
Salinas agreed to pay a fine to settle charges he reaped improper profits from undisclosed loan deals involving a TV Azteca subsidiary, according to a September 2006 statement from the SEC. Salinas, 56, didn’t admit or deny the allegations when he agreed to the settlements, according to the SEC.
Shareholders of Elektra and TV Azteca voted to remove the companies’ shares from the New York Stock Exchange in 2005 after the civil fraud suit was filed against Salinas by the SEC.
Punto’s role as the biggest buyer of Elektra stock has surpassed that of peers in the nation’s benchmark index and abroad. Grupo Financiero Inbursa SAB, the Mexican lender controlled by billionaire Carlos Slim, was the third-biggest buyer of Slim’s wireless carrier America Movil, accounting for 14 percent of the volume in the past year. In the U.S., Citigroup was the eighth-biggest trader of its own shares, with 2.7 percent of total volume.
John Coffee, a professor of U.S. securities law at Columbia University in New York, said stock markets need clear rules on buybacks to prevent companies from exerting too much influence over trading.
U.S. companies seeking so-called safe harbor from manipulation charges shouldn’t repurchase in one day more than 25 percent of the average daily volume over the past four weeks, according to the SEC’s website. Mexico sets no buyback limit based on daily trading volume and allows companies to acquire as much as 3 percent of the shares in circulation in the open market over a 20-day period.
In the U.S., “this has long been governed by very clear quantitative restrictions because otherwise you are in effect manipulating the market,” Coffee said in a telephone interview from New York. “We let you buy, but not more than what I would call an immaterial percentage of the overall trade.”
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