| LONDON, Sept 14
LONDON, Sept 14 Hedge funds are betting that
commodities trader Glencore will succeed in its battle
for miner Xstrata, in a long-running deal that has been
profitable for arbitrageurs and is still attracting funds
looking to make money.
Arbs, hungry for action after a lean period for M&A, have
been buzzing around the deal for months, attracted by its size,
liquidity and complexity, and many profited from last week's
move by Glencore to sweeten its now 23 billion pound ($37
billion) all-share bid.
Xstrata was expected to recommend the offer as early as next
week, although Qatar Holding - its second-biggest investor after
Glencore - has yet to make its decision public.
However, after a breakthrough in talks last week, brokered
by former British prime minister Tony Blair, many funds believe
it is only a matter of time before the deal gets the Qataris'
stamp of approval.
"We are quite confident that Glasenberg will close this one
once and for all," said Amit Shabi, partner at Paris-based
Bernheim, Dreyfus & Co.
"It is quite natural that they (Qatar) stay neutral before
Xstrata's statement. We believe that once Xstrata management
approves the merger, Qatar will follow smoothly."
Merger arbitrage funds typically buy shares in the target
company in a deal and short-sell the acquirer. Short-selling
means betting on a lower price by borrowing shares you do not
own and selling them in the market, with the aim of buying them
back at a cheaper price.
Shabi initially played the deal by reversing the typical
merger arbitrage trade and buying Glencore shares and shorting
Xstrata, betting the spread between the two stocks would widen.
However, he later reversed this when the high cost of
borrowing Glencore shares to short-sell fell, betting the spread
would narrow - a move he said was "very lucrative".
Xstrata shares are 7.8 percent higher than before news of
Glencore's improved deal, while Glencore shares are down 4.3
percent in the period.
Glencore's offer stands at 3.05 new shares per Xstrata
share, up from 2.80 shares.
One fund manager who asked not to be named said he was also
expecting a recommended deal on Monday or early next week,
adding there was no real reason now for Qatar to block the deal.
A number of hedge funds have been putting on bets since
Glencore's improved offer was announced, also buying Xstrata and
shorting Glencore, he said.
Another hedge fund sticking with his position said big hedge
funds specialising in betting on deals facing antitrust rulings
were now getting involved.
"It has been a fantastic deal for hedge funds but especially
for those that came in after Qatar stepped in. Those who were
holding shares since the very beginning actually lost money."
One headache has been the high cost of borrowing Glencore
stock, if funds want to want to sell short, due to its low free
float. One hedge fund executive told Reuters the cost was around
10 percent, compared with the usual cost of borrowing a stock of
Anne-Sophie D'Andlau, co-founder of Paris-based hedge fund
firm CIAM, profited last week from her long Xstrata, short
Glencore position, after finding "expensive" Glencore stock to
short, and is now watching the cost of borrowing more shares
stands before deciding what to do next.
"We were expecting a last-minute agreement and 3.05 is close
to our expectations. We think board approval will be finally
obtained and that Glencore will be able to complete the
transaction in the end," she said.
"We are going to see what we will do with the position.
There is still antitrust (approval) to be obtained, in
particular in Europe. We will see where the borrow stands, if it
stays the same or not. It proves you never know on a deal until
the last moment."