* Says investors wary of complex deals
* Cheyne European Event-Driven hedge fund raises $500 mln
* Says LTRO cut volatility, likely to fuel further deals
* Sees more deals in core Europe than periphery
By Laurence Fletcher
LONDON, Feb 28 Bold merger arbitrage funds
are set to enjoy rich pickings this year amidst a rebound in M&A
activity, helped by the reluctance of many investors to trade
complex deals after last year's choppy markets, says hedge fund
firm Cheyne Capital.
Simon Davies, whose European Event Driven fund, has raised
$500 million since launch in October 2009, told Reuters that
last year's volatility had made many investors "quite risk
averse", meaning there is room for arbs to profit from more
Merger arb funds try to make money by betting on M&A deals,
often by buying shares in the target company in the hope it will
rise to the offer price and betting that the share price of the
acquiring company will fall.
These funds, which pride themselves on their in-depth
research, tend to prefer more complex, all-share deals or bids
with lots of uncertainties, for example around whether
regulators or shareholders will accept the deal, to more
"Risk appetite is coming back, but only for things that are
perceived by the market as extremely safe. If, on the face of
it, a deal has any issues, then the risk/reward of the
investment is often much better," Davies told Reuters in an
interview this week.
"We are entering a potentially golden period, where there
can be a lot of deals and not too much interest in trading them,
outside of the standard safe situations," he added.
His comments coincide with a resurgence of mergers and
acquisitions in recent months, boosted by high corporate cash
balances, low valuations and a slump in market volatility that
is persuading boards to move ahead with deals they had postponed
during the worst of the euro zone debt crisis.
The most prominent deal has been commodity trader Glencore's
25 billion pound proposed takeover of mining group
Xstrata, which some hedge funds have been eyeing up.
Meanwhile, India's state-run Oil and Natural Gas Corp
and GAIL India are reportedly planning to
offer $2 billion for Cove Energy, joining a bidding war
that has already seen offers by Thai state-controlled PTT
and Royal Dutch Shell.
Elsewhere, United Parcel Service has bid for Dutch
mail delivery firm TNT Express.
While M&A volume was up last year, it fell in the second
half as Europe's debt woes deepened.
"There are plenty of companies with valuations that,
although they've recovered somewhat, are nowhere near back to
their highs," said Davies.
"However, they've got very strong market positions and would
be of interest to much larger conglomerate companies in that
sector with large cash balances. TNT is a good example of this
and there's a good chance there'll be more than one bidder."
While many recent deals have been cash rather than more
complex share bids, Davies said such deals "can still have good
rates of return ...especially if there are complex issues such
as antitrust, unhappiness among the target shareholder base
regarding the price etc. This last issue is frequently a concern
in a recovering market".
Cheyne's bets include a 2.39 percent stake in hedge fund
administrator GlobeOp, which has received a bid from TPG
Capital. Software firm SS&C Technologies has since said
it is considering a possible cash offer.
The European Event Driven fund, which Cheyne plans to close
to new investors at $750 million, gained 20.5 percent in 2010,
2.7 percent last year and 1 percent in January, according to an
investor letter seen by Reuters.
In February so far it is up 2.4 percent, said a source
familiar with the matter. Last year the average merger arb fund
made 1.48 percent, according to Hedge Fund Research.
Davies sees more M&A ahead after the European Central Bank's
long-term refinancing operations (LTRO) in December, which
flooded markets with 489 billion euros ($655 billion) of cheap
cash to try and head off a second credit crunch.
"Many observers underestimated the power of LTRO -- that's
set the fundamentals of the market rally, driven volatility down
and indirectly helped M&A," he said.
"The pipeline for M&A is pretty big. In the last six months
M&A volumes were very low, so there's a lot of targets that
managements have wanted to acquire but haven't because of
uncertainty over the eurozone."