Hedge funds eye profits as Chinese regulator flexes M&A muscle

LONDON Tue Mar 12, 2013 7:43am EDT

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LONDON (Reuters) - China's antitrust regulator could become the new best friend of hedge funds seeking to profit from the unpredictability of the youngest of the world's main watchdogs.

The country's Ministry of Commerce (MOFCOM) is becoming a key player in global mergers and acquisitions (M&A) as increasing activity brings more deals within its remit, such as Glencore's (GLEN.L) takeover of miner Xstrata XTA.L and advertising group Dentsu's purchase of Aegis AEGS.L.

Though MOFCOM is viewed by some investors as hard to read and open to political interference, its opaqueness has created uncertainty that some eagle-eyed hedge funds are pouncing on.

For instance, funds have cranked up their bets on commodities group Glencore's (GLEN.L) protracted attempt to seal its $35 billion takeover of Xstrata XTA.L in recent weeks.

Approval from MOFCOM is needed because of Glencore's share of China's concentrate imports and is the final hurdle for the deal. While approval is likely, albeit with some potential conditions attached, the process has dragged on much longer than many had expected.

"People thought Glencore-Xstrata would be approved in December. It does create an opportunity," said a manager at a leading fund that trades M&A deals. "MOFCOM has a very low rate of rejecting anything. We have a good-sized bet on the deal today."

ATTRACTIVE SPREADS

Glencore last week said that MOFCOM was investigating areas including the supply of copper concentrate, the raw material for copper smelters, among other markets, but CEO Ivan Glasenberg said he is optimistic that approval will be given soon.

Funds have been attracted by the so-called spread - the gap between the deal price and the current share price. This spread, which funds can exploit, has widened to almost 2 percent.

While small in absolute terms, hedge funds that specialise in profiting from tiny inefficiencies around mergers and acquisitions - usually by buying shares in the target company and betting the price of the acquirer will fall - can view such a return as highly lucrative.

A 2 percent spread, for instance, equates to a 12 percent annualised return if a fund has to wait two months for the profits, and 24 percent if the deal takes only a month to be completed.

While hedge funds tend to dislike uncertainties around deals that are hard to analyse, they are quick to pounce on situations where nervousness among other investors creates investment bargains.

"MOFCOM has appeared in everyone's deals over the past few years," said the manager of the fund trading in M&A deals. "China is a bit newer to anti-trust approvals, so the process is not as defined."

HUNGRY FOR MORE

MOFCOM, the only such regulator to take national industrial policy into consideration when making its decisions, has blocked only one deal since anti-monopoly laws came into force in 2008 - Coca-Cola's (CCE.N) planned purchase of juice producer Huiyuan in 2009.

Lionel Melka, partner at Paris-based Bernheim, Dreyfus & Co, who traded the deal last year but later sold out, took a new position in the Glencore deal at the end of January and has gradually increased it since then.

"I'd like to increase it (further) but we can't because of (the fund's) risk management ... most people are at full capacity," Melka told Reuters.

He said he expects MOFCOM to grant approval before the end of the month and the deal to close in the first week of April.

Melka is also betting on Dentsu's acquisition of marketing group Aegis, another deal that has been waiting for MOFCOM approval. Hedge fund Magnetar Financial also owns Aegis shares.

The deadline for the completion of the deal was pushed back last month to March 28 from February 28, citing MOFCOM's review.

"MOFCOM aren't used to this process. The U.S. and Europe have lots of experience and lots of people to look at transactions," Melka said. "MOFCOM needs to hire more people and put in more resources."

(Additional reporting by Clara Ferreira-Marques; Editing by David Goodman)

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