CORRECTED-Hedge funds get headache from German hospital tussle
(Corrects figure in first paragraph to $3.9 billion from $3.2 billion)
By Ludwig Burger and Andreas Kröner
FRANKFURT Aug 31 (Reuters) - Dozens of deal-starved merger arbitrage hedge funds in New York, London and Monaco got more than they bargained for when they piled into what looked to be a straightforward $3.9 billion German hospitals takeover.
The proposed takeover of German hospital group Rhoen-Klinikum by healthcare conglomerate Fresenius , first announced in April, looked like an attractive bet for these arbitrageurs amid a global dearth of M&A trading opportunities.
But completion of the deal was scuppered in June when rival Germany hospital group Asklepios effectively blocked the bid by buying a 5 percent stake in Rhoen.
The hedge funds got caught out as Rhoen's shares tumbled and they could get burned again if potential efforts to revive the deal come to nothing.
There has already been a lot of talk about attempts to salvage Fresenius's bid for Rhoen with various negotiations between the groups.
But the tussle is still no nearer a resolution four months on from the original deal.
One UK-based situations-driven investor called it "the worst takeover deal I have ever been involved in."
"I get up at 2.45 every morning so that I can call all my contacts in Europe," one U.S. investor lamented. "It's a complete mess."
It seemed like a good idea at the time because it was one of the few M&A deals around.
Global M&A activity in the first eight months of the year was down 18 percent from the year ago period, Thomson Reuters data shows. August was the slowest month for deal-making in Europe since April 2009.
"Around the globe hardly anything else is happening due to the uncertainty in the euro zone," one fund manager said.
Fresenius's original offer for Rhoen was at a juicy premium of more than 50 percent. This rich offer prompted a rush by hedge-fund investors, including U.S. investor John Paulson, to buy the target's shares on the open market for slightly less than the offer price, aiming to tender them to Fresenius and turn a profit.
Estimates for what percentage of Rhoen's shares are held by situation-driven funds range from 30-40 percent.
The hedge funds were not initially concerned about an unusually high minimum acceptance threshold of 90 percent for Rhoen shareholders because they believed that unless a competitive bid emerged, no one in their right mind would not sell their stake at such a good price.
But they did not reckon with a gatecrasher. On June 29, the original tender period's last trading day, unlisted rival Asklepios bought its stake of more than 5 percent in Rhoen, stopping the deal in its tracks.
Asklepios, controlled by headstrong founder Bernard Broermann, showed no inclination to launch a rival bid but seemed instead to want to sabotage the Fresenius deal, which one source said Broermann viewed as a threat to his company's growth strategy.
Rhoen shares went into a tailspin, plunging 20 percent in a matter of days. Trading volumes in Rhoen shares over the last 90 days have soared to levels three times above the year-earlier period.
The share price recovered some lost ground when Rhoen founder and chairman Eugen Muench -- who had championed the initial deal while sidestepping his own management board -- expressed confidence the proposed tie-up could be revived.
Fresenius, for its part, said it would decide in August whether it could breathe new life into the deal, setting off some intense boardroom haggling.
Fresenius, which also makes infusion drugs and tube feeding gear, needs the backing of Rhoen's two boards for regulatory reasons and has to come up with ways to keep Broermann and two other healthcare industry investors seen as hostile to Fresenius at bay.
Sources have said Fresenius is ready to lower the acceptance hurdle to just over 50 percent of Rhoen shares from 90 percent.
As a result, merger arbitrage investors, who had not already given up on the deal, took heart.
"Logic dictates the deal gets done," one London-based investor said, speaking on condition of anonymity. Although he also showed his frustration by adding: "What's preventing the deal? We don't know what's motivating people."
But as September approaches, he and his peers are still being kept on the edge of their seats. It remains unclear whether Fresenius will push ahead with a new approach. Sources said that the company would decide early next week.
In the meantime, the hedge fund investors, most of which struggle to pronounce the names of the German companies involved, are forced to call to bankers incessantly as well as investor relations departments, advisors and journalists, in the hope of finding some clarity.
"The failed deal on the last day of trading in June really hurt people's performance for the month on that day. There is a real fear that this will happen again on the last day of trading in August," the investor added. (Additional reporting by Hakan Ersen. Editing by Jane Merriman)