LONDON More than a dozen hedge funds are set to book big profits supporting South Korea's state oil firm in its pursuit of British peer Dana Petroleum.
The funds, including Eric Mindich's Eton Park and Philippe Jabre's Jabre Capital, have built up stakes totalling more than a third of Aberdeen-based Dana's shares, wagering the Koreans' $6.5 billion warchest and thirst for resources will prevail despite rebuffs from Dana DNX.L chief executive Tom Cross.
Aside from Kraft Foods Inc's KFT.N pursuit of Cadbury, few European takeovers since the credit crisis have attracted as much attention -- and money -- from merger arbitrageurs, or arbs.
And they appear to have been proved right, partly thanks to their own efforts. On Friday, Korea National Oil Corp KNOC.L unveiled a hostile 1.7 billion pound bid for Dana worth 1,800 pence per share.
"It's a pretty good place to be," said a hedge fund manager who has invested in the deal.
KNOC's bid is backed by letters of intent from 48.62 percent of shareholders, including 16 hedge funds with a total 27.42 percent held via contracts for difference (CFDs).
"This will have been a very successful trade for the arbs," said David Roden, director of Independent Global Research, a London-based firm specialising in merger research.
Regulatory disclosures offer clues, but not a complete picture, of how much money funds will have made, because stakes only have to be disclosed once a takeover is under way and an investor holds more than 1 percent.
Eton Park, the fund founded by Goldman Sachs alumnus Eric Mindich, is the biggest of KNOC's 16 hedge-fund backers, with an overall 3.43 percent stake.
For the 2.46 percent for which data is available, its average purchase price of 1,669 pence implies a paper profit of 3.0 million pounds, according to Reuters calculations.
For Swiss-based Jabre Capital, the second-biggest backer, disclosures show 2.38 percent of its overall stake was bought at an average 1,686 pence. That spells a 2.6 million pound profit before its remaining, unpriced 0.9 percent stake.
Peter Schoenfeld's eponymous P. Schoenfeld Asset Management PSAM.L, a slightly smaller holder, has made more than 3.2 million pounds on the 1.32 percent of its holdings where pricing data is available, buying at an average 1,539 pence.
Other funds backing KNOC include Davidson Kempner, Tyrus Capital, and Pentwater Capital, while at least three big funds have not signed letters of intent.
Several others, including Och Ziff Capital Management (OZM.N), the $25 billion U.S. hedge fund manager, have taken significant positions in Dana's convertible bonds.
Roden at IGR, who began his risk-arbitrage career in 1980, said hedge funds were drawn to a "disconnect between Dana and its shareholders" over the merits of an offer from a credible bidder at a price many investors were happy with.
But he said the funds had risked "very substantial" losses if KNOC had walked away -- Dana shares traded below 1,200 pence before KNOC's approach.
(Editing by Dan Lalor)