Severn Trent Shares Nosedive, Merger Arb Funds In Heavy Losses

Severn Trent Shares Nosedive, Merger Arb Funds In Heavy Losses

Severn Trent Plc (LON:SVT) shares plummeted after the British utility company rejected the third offer by a Canadian-led consortium. The consortium consisted of LongRiver Partners, Borealis Infrastructure Management Inc., the U.K.’s Universities Superannuation Scheme and Kuwait Investment Office. The final offer valued Severn Trent Plc (LON:SVT) at £5.3bn ($8.3 billion). The Coventry-based company has already rejected two previous offers on June 3 and May 15.

severn trent

Severn Trent Plc (LON:SVT) shares slumped 9.32 percent to 1756.47 pence, its steepest one-day drop since October 9, 2006. The company let the bid deadline expire today, ignoring an invitation to negotiate the price. The LongRiver Partners-led consortium offered to pay 2,200 pence a share. Severn Trent Plc (LON:SVT) said the offer was still too low.

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Severn Trent and Hedge Funds

The takeover breakdown caused the biggest losses to hedge funds that invested in Severn Trent, hoping that it will accept the takeover offer. Now the stock is trading below its pre-bid price, multiplying losses for merger arbitrage funds. It can’t be calculated exactly how many shares hedge funds held. U.K. laws don’t allow investors who have less than a 1 percent stake to publicly disclose their holdings in a takeover offer.

Only two U.S. hedge funds held more than 1 percent of shares in the company. Elliott Capital Advisors had 1.27 percent stake while Davidson Kempner European Partners owned 1.05 percent shares of Severn Trent Plc (LON:SVT) as of June 7. Sources told Tommy Wilkes and Anjuli Davies Reuters that hedge funds held about 5 percent of the British utility company’s stock.

Merger arbitrage funds have already been struggling this year due to an anemic M&A environment. The Severn Trent Plc (LON:SVT) deal breakdown pushed those hedge funds into losses as they thrive on big ticket deals. According to the Hedge Fund Research, the average hedge fund is up about 5 percent this year so far, while the average merger arbitrage fund has gained only 1.9 percent.

Hedge funds had also suffered huge losses when United Parcel Service, Inc. (NYSE:UPS) decided to abandon its 5.2 billion euro offer for TNT Express NV (AMS:TNTE). Hedge funds had accumulated about 30 percent of TNT Express NV (AMS:TNTE) shares before the European anti-trust regulators said they will block the deal. Hedge funds lost approximately $700 million on that deal.

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