* LongRiver consortium walks away from Severn Trent deal
* Elliott, Davidson, among funds to hold Severn shares
* Lack of M&A this year hurting hedge funds
By Tommy Wilkes and Anjuli Davies
LONDON, June 12 Hedge funds that bet Severn
Trent 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 anaemic M&A
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 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 percent
this year against a near 5 percent rise in the average hedge
fund, data from Hedge Fund Research shows. Over the past three
years merger arbitrage managers have made 3.4 percent, while
across all strategies the average fund has gained 5 percent.
"Investors are chasing the same few high-profile M&A
opportunities and end up hit by the same adverse events," said
Thierry Lucas, founder of London-based hedge fund Portland Hill.
"I've been staying away from merger arb. This may change if
the environment improves and we see a big wave of M&A."
Lionel Melka, partner at Paris-based hedge fund Bernheim,
Dreyfus & Co said the collapse of Severn Trent deal talks was
not a depressing sign for future M&A activity because it was a
very particular situation of a regulated company that attracts
infrastructure investors for its inflation-protected cash flows.
"Given the low offer and the asset scarcity, we did not get
involved. The nature of the bidder also played its part; it is
always more difficult to bring a consortium in a bidding process
with a board than an individual buyer," he said.
"Finally, the fact that this deal did not go through is not
similar to a definitive agreement not getting done."
UPS's decision to abandon its 5.2 billion euro bid for TNT
in January left funds nursing potential losses of more than $700
million, sources said at the time. Funds owned an estimated 30
percent of TNT shares before news European antitrust regulators
would veto the deal, the sources said.
Other losing positions this year include small wagers on
Meda, currently in talks about a deal with India's
Sun Pharmaceutical Industries, after shares in the
Swedish drugmaker fell as prospects for a takeover
The big hope for managers now is that a deal like Vodafone's
approach to buy Germany's biggest cable company Kabel
Deutschland - announced on Wednesday - becomes a
prolonged bid battle from which they can wring a profit.