Severn refusal knocks hedge funds

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 shares in Severn Trent down 8.3 per cent yesterday, 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.

Severn Trent supplies 4.2 million households and businesses including customers in Rotherham, Sheffield and Scunthorpe.

“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 one per cent in a company under a takeover offer.

Two US 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 per cent and 1.05 per cent 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 £40m for the majority of its stake to earn itself a regulatory filing.

Two of those sources estimated hedge funds owned around five per cent of Severn’s stock – by comparison, managers owned almost a third of TNT Express when it was under offer from rival United Parcel Service in January.

But losses on the Severn deal come on top of a series of struggles this year for merger arbitrage funds who wager on the outcomes of bid attempts.

Most are grappling with a slowdown in new M&A deals this year – particularly in Europe and the cross-border big ticket deals they thrive on – while the few takeovers that have emerged have left many funds wrongfooted. The average merger arbitrage fund is up just 1.9 per cent this year against a near five per cent rise in the average hedge fund, data from Hedge Fund Research shows.