Over the last decade-plus, since dumped its TSX listing entirely in June, 2013, Lululemon went from about $10-billion in market capitalization to $70-billion.Matt Rourke/The Associated Press
Vancouver’s Lululemon Athletica Inc. LULU-Q has risen so far, so fast that it has now joined the S&P 500 Index of the biggest, most-valuable blue-chip American companies.
Wait, pause, hold up, record scratch – American companies, as in the United States? Since when is one of the biggest success stories in B.C. business history deemed a U.S. company?
Well, since 2013, according to S&P Dow Jones Indices, the purveyor of many of the world’s most prominent stock indexes – including the main ones in Canada, the broad S&P/TSX Composite and the blue chip S&P/TSX 60.
But why? S&P Dow Jones Indices spokesperson Lauren Davis, who provided the 2013 date, declined to explain. S&P doesn’t like giving explicit answers to such questions, preferring to say it’s at the discretion of its index committee. (Powerful and mysterious!)
The answers can be surmised, however, in the fine print in the S&P’s index methodologies, which contain much larger implications for corporate Canada and the relevance of the Toronto Stock Exchange.
Lululemon went public in 2007 with its primary stock listing on the Nasdaq and a secondary stock listing on the Toronto Stock Exchange (TSX). And while it listed Vancouver as its principal headquarters, it was incorporated in Delaware.
From the get-go, it satisfied two of the three “principal” criteria for S&P considering it a U.S. company: place of incorporation and a primary listing on a U.S. stock exchange. But there are other things S&P looks at, such as the geographic breakdown of revenue and assets.
As it happens, when Lululemon filed its annual report in 2013, it reported that, for the first time, the United States accounted for a majority of its annual sales. That may have tipped the balance in the index committee’s thinking.
It didn’t matter, but also didn’t hurt Lululemon’s U.S. case when it dumped its TSX listing entirely in June, 2013, saying its minimal Canadian trading volume no longer justified the expense and effort.
And it sure didn’t hurt the company’s valuation: Over the last decade-plus, Lululemon went from about $10-billion in market capitalization to $70-billion. It’s easily the most valuable Canada-headquartered company that doesn’t list on the TSX. Had it put its primary listing in Toronto, it would be competing for a spot in the Top 10 list of most valuable companies in the S&P/TSX Composite Index. (The company did not respond to requests for comment.)
This is not all market trivia, however. Lululemon’s TSX-eschewing path, which saw its S&P 500 inclusion Wednesday, is bad news for the country’s equity markets and the TSX itself.
The S&P/TSX indexes already make an important concession that the U.S. indexes don’t reciprocate: A company can have its primary listing on a U.S. exchange and still be included in the S&P/TSX Composite and S&P/TSX 60. Two big recent examples: Shopify Inc. and (cough cough) Valeant Pharmaceuticals International Inc., each of which, at one time, passed Royal Bank of Canada to become the single biggest company in this country.
The siren song of U.S. passive investing may entice more companies to shift incorporations, exchange listings, securities filings or even headquarters to grab hold of U.S. investors.
According to Morningstar Direct, there’s US$3.4-trillion – with a “t” – in index funds that track the S&P 500, meaning they have to buy the shares of member companies. As companies work their way up, there’s plenty of demand for their shares: US$118-billion tracks the S&P MidCap 400; nearly US$97-billion tracks the Russell 2000.
The amount of investment tied to the U.S. exchanges has skyrocketed since the former Encana Corp. made its run to the border in 2020, citing its desire to grab passive American investor money. In that case, the company changed its incorporation to Delaware, moved its headquarters to Denver from Calgary and inventively dubbed itself “Ovintiv.” And been added to multiple U.S. indexes.
Spokesperson Patricia Posadowski says the company believes its current passive, or index-style, ownership is now greater than 20 per cent, compared with less than 10 per cent prior to the domicile change.
Ms. Posadowski declined to comment, however, on whether Ovintiv – which, as Encana, had a majority of its revenue and assets in the U.S. as early as 2014 – could have accomplished this without a wholesale abandonment of Canada.
The S&P rules and Lululemon’s path suggest an easier way. Watch out, in fact, for Shopify. The company remains Ottawa-headquartered and Canada-incorporated, making this country its logical domicile. But if it wanted to chase the U.S. indexing dollars, many of the pieces are in place for a domicile change.
Shopify has that primary U.S. listing, and as of last fiscal year, a majority of its revenue and assets are U.S.-based. It would take a simple, shareholder-approved incorporation switch to make it a U.S. company in S&P’s eyes. It would then depart the S&P/TSX Composite, where it’s currently the sixth-most-valuable company. (Shopify failed to respond to a question on whether it has U.S. intentions.)
The danger is that any Canadian company with global aspirations will ultimately want to, and successfully find, a way to be deemed a U.S. company by S&P. (There are already 71 Canadian-incorporated companies with their primary listings on a major U.S. exchange, according to S&P Global Market Intelligence, including five members of the S&P/TSX 60.) That kind of exodus would leave the TSX as an exchange only for the Canadian companies that are unwilling or unable to expand meaningfully beyond our borders.
Presented with this idea, the TSX pushed back. In a statement, its chief executive officer, Loui Anastasopoulos, described Canadian markets as “world class” and have “an impressive track record in nurturing companies through each stage of their growth cycle. In our view, Canadian companies with global growth aspirations are best reflected in the S&P/TSX indexes.”
Lululemon has shown, however, that successful Canadian companies can go global and grab the big prizes with no help at all from Canadian exchanges. The health of this country’s capital markets depends on Lululemon being an odd outlier, not a new standard-bearer.