Private Equity Faces Off Hedge Fund Shorts in Bid for U.K. Plc

Hedge funds saw a consumer company set to struggle as the U.K. emerges from the pandemic and grapples with the aftermath of Brexit. A private equity giant saw a buying opportunity.

Wm Morrison Supermarkets Plc was among the country’s most-shorted stocks before a buyout offer from Clayton Dubilier & Rice sent the shares up by the most in three decades. It’s served as a warning for those making bearish bets as cash-rich private equity companies have been spotting bargains across Britain.

Private Equity Faces Off Hedge Fund Shorts in Bid for U.K. Plc

Buyout firms have splurged $17 billion on takeovers of publicly traded British targets so far in 2021, the busiest start to a year since 2007. Meanwhile, one measure of short bets on FTSE 350 companies is hovering near the highest in 12 months.

That’s set up the nation’s companies as a battleground for global investors, particularly retailers, which feature prominently among the most-shorted names. The U.K. has endured some of the harshest Covid lockdowns, while also dealing with supply chain and trade flow fears sparked by uncertainties about how Brexit would impact the country’s economy.

Private equity firms, sitting on $1.4 trillion, have plenty of dry powder to make bearish bets look foolish in the short-term, even if some of the expected consumer pain does play out.

Private Equity Faces Off Hedge Fund Shorts in Bid for U.K. Plc

When Morrison’s management rejected the offer, shareholder exuberance didn’t waver, and short sellers raced to stem their losses. BlackRock Inc. cut its short down to 1.13% on Monday from 2.29%, while Citadel and GLG Partners reduced their bearish positions to below levels that require public reporting, according to data compiled by Bloomberg.

The news also sparked rallies at other grocers such as J Sainsbury Plc, which up until Friday was the most targeted U.K. listed company by bearish investors, as well as Marks & Spencer Group Plc. Wagers against Sainsbury were cut by hedge funds Citadel and Marshall Wace, Bloomberg data show.

Spokespeople for BlackRock and Citadel didn’t immediately reply to a request for comment. Representatives for GLG and Marshall Wace declined to comment.

The buyout deals mark a catch-up after some large global private equity funds avoided the U.K. in recent years because of the uncertainties around what Brexit would mean, said Jon Whiteman, partner at CIL Management Consultants, which advises PE firms.

Buyout funds have been also bumping up their offers, sparking sharp gains in target companies. Premiums on U.K. targets have averaged 29.6% this year, Bloomberg-compiled data show. That’s the third-highest level in the past decade.

Morrison is not the only trade that led to declines for short sellers.

When Lone Star Funds agreed to buy retirement homebuilder McCarthy & Stone last October in a 630 million-pound ($878 million) deal, its shares surged as much as 44% on the news. In November, AA Ltd. shares rallied after TowerBrook Capital Partners and Warburg Pincus agreed to buy the roadside recovery firm. Both companies were among the most shorted in the U.K.

Massimo Stabilini, a former Paulson & Co. executive who runs his own hedge fund Sinclair Capital, says he bought some Morrison shares on Monday and expects a deal at as much as 270 pence per share. That’s more than 50% above Friday’s closing price and could lead to heavy losses for short sellers.

More ominously for bearish investors, Stabilini also warns of a takeover battle. “Those who missed Asda will take a close look,” he added.

©2021 Bloomberg L.P.

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