Severn Trent deal blow hits 'merger arb' funds

Wed Jun 12, 2013 9:30am EDT
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By Tommy Wilkes and Anjuli Davies

LONDON (Reuters) - Hedge funds that bet Severn Trent (SVT.L: Quote) would agree to a Canadian-led takeover are reeling from losses after the water company refused to talk, casting further doubt on their money-making abilities in an anemic M&A environment.

The LongRiver consortium walked away after the British utility let the bid deadline expire on Tuesday, ignoring an effective invitation to negotiate on price.

That sent Severn Trent shares down 8.3 percent on Wednesday, adding to falls on Monday and leaving it below its pre-bid price, piling up the losses for hedge funds that bought stock in the past three weeks expecting a deal to be sealed.

"It's pretty disappointing. It looks like the bid/ask spread wasn't that wide, so it's perplexing," said one hedge fund investor who spoke on condition of anonymity. "The bigger problem here is the current deals environment."

It is impossible to calculate exactly how many shares were held in the hands of hedge funds because UK regulations stipulate that investors must only publicly disclose stakes larger than 1 percent in a company under a takeover offer.

Two U.S. hedge fund giants, Elliott Capital Advisors and Davidson Kempner European Partners, did tip the scale with stakes in Severn on June 7 equivalent to 1.27 percent and 1.05 percent respectively, but others will have smaller holdings.

People familiar with the market say the deal attracted a number of hedge funds, though the short period between initial bid and collapse, and the lack of trading in Severn shares, ensured most funds' bets were small - Davidson had to spend around 40 million pounds for the majority of its stake to earn itself a regulatory filing.

Two of those sources estimated hedge funds owned around 5 percent of Severn's stock - by comparison, managers owned almost a third of TNT Express TNTE.AS when it was under offer from rival United Parcel Service (UPS.N: Quote) in January.   Continued...

A Severn Trent sign hangs on a gate at Cropston Reservoir in Cropston, central England, May 15, 2013. REUTERS/Darren Staples