Greedy Hedge Funds Push Buyout Bidders to the Edge

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When hedge funds are pushing private equity firms around, it’s hard to see things ending well. Merger arbitrageurs in the U.K. have been betting that deal-hungry buyout firms have infinite funds to pay sky-high prices for assets. But the arbs’ aggressiveness in driving up the shares of buyout targets may be a sign of something more troubling than optimism.

The M&A market is frothy and private equity firms are keen to put their vast funds to work. Many takeover targets are attracting several suitors. Hence, share prices have often traded above the level of the last offer, anticipating something higher will come along. That's happened even when the company has accepted what's on the table. The greedy gamble hasn’t always paid off.

Shares in G4S Plc continued to trade above where it agreed to be bought by Allied Universal Security Services LLC in December. But a hoped-for counterbid from Garda World Security Corp., backed by buyout firm BC Partners, didn’t materialize.

Signature Aviation Plc rallied above where it accepted an offer from buyout firm Global Infrastructure Partners in January. Investors anticipated Blackstone Group Inc. and Carlyle Group Inc. would create a three-way battle for the private-jet refueling business. In fact, Blackstone and GIP joined forces on a modestly higher bid that was below where the shares had been changing hands.

A similar dynamic is now playing out with Aggreko Plc, a supplier of power to events like the Glastonbury Festival. The shares have surpassed the 880 pence bid price agreed with private equity firms I Squared Capital and TDR Capital. That may reflect hopes that a U.S. trade buyer, armed with synergies, will enter the fray.

Merger arbs have so far taken it on the chin when auctions haven’t quite gotten to where they’d pushed the target company’s shares. That might be because they have built most of their holdings at lower prices earlier on in the saga. But their willingness to chase takeover targets’ shares above agreed deal prices cannot be ignored. It suggests the risk that at some point, a group of activists will simply refuse to accept the bid on the table unless it is sweetened.

After all, market pressure forced U.S. buyout firm Lone Star Funds to improve its offer for U.K. retirement home operator McCarthy & Stone Plc by 4% in December in the absence of a counterbid. But the original deal had been tied up before positive vaccine news sent markets higher in November so a tiny bump up was hardly contentious. If neither side blinks in the next such situation, the deal could then collapse.

Buyout firms generally opt for the U.K. bidding structure called a scheme of arrangement. These have a 75% acceptance threshold. So it wouldn’t take a very large group of naysayers to carry out the threat to vote down a deal if the bidder doesn’t provide an 11th-hour top-up. The company management would lose credibility, the bidder would lose its deal and the shares would plummet. It might only take one such train wreck for the flood of public-to-private attempts to suddenly dry up.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

Chris Hughes is a Bloomberg Opinion columnist covering deals. He previously worked for Reuters Breakingviews, as well as the Financial Times and the Independent newspaper.

©2021 Bloomberg L.P.

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