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Hedge funds face losses over UPS-TNT deal - FT.com
Hedge funds face losses over UPS-TNT deal
By Alex Barker in Brussels, and Anousha Sakoui and Sam Jones in London
Hedge fund managers stand to lose hundreds of millions of dollars if the merger of UPS and TNT Express, one of the largest European deals this year, falls apart after unexpected extensive competition objections from the European Commission.
So-called merger arbitrage funds piled into Dutch logistics company TNT this year, expecting to pick up healthy profits as the deal neared completion at a premium to the company’s share price.
For the past week the market has been giving the deal just a 50:50 chance of success. With those odds, some merger arbitrage funds have thrown in the towel – but others stand to lose even more money if the deal collapses.
“There is no analysis you can do on this,” said one arb specialist. “You are in uncharted territory. I’ve seen a lot of legal work show one result and the same in-depth analysis shows a different outcome.”
Investors’ trades are not made public so it is not known which funds hold large positions or might face big losses, though many of the hedge fund industry’s biggest names have been closely following the transaction.
The strength of the commission’s objections to the UPS-TNT tie-up have surprised investors and the company’s executives, who had confidently predicted that the EU would grant approval in August after a fast-track investigation.
Brussels instead opened a full antitrust probe and concluded that the deal damaged competition in the cross-border express parcel market in 29 European Economic Area countries. Only in Liechtenstein was the combined group’s presence not harmful, according to people familiar with the Commission’s formal objections.
The fate of the deal rests on whether UPS can overturn some of Brussels’ key arguments – most importantly on the definition of the market – and shape a package of asset sell-offs that will address remaining concerns. Those people involved in the process do not expect the Commission’s analysis to change dramatically.
Several factors have driven interest from merger arbitrage hedge funds in the deal: the widely held view that UPS would win fast EU regulatory clearance, or at worst be asked to make piecemeal asset sales; UPS’s pledge to pay TNT a €200m termination fee if the deal fell through; and the relative scarcity of other mergers to speculate on.