Melrose shorts build £1.3bn bet as sub-prime star Paulson shows his hand in GKN battle

Oliver Gill
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Melrose's approach received 52 per cent approval from GKN shareholders (Source: GKN)

Bets against Melrose Industries have hit fresh highs as hedge funds ramp up short positions against the would-be GKN owner.

In trades totalling £1.3bn, almost a third (31 per cent) of Melrose shares are on loan to hedge funds.

Melrose short positions have doubled over the last month, according to IHS Markit. With the UK government mulling an intervention, they have continued to rise since the firm's £8bn GKN approach was narrowly voted through by shareholders on 29 March. Such movement has been mirrored by a 10 per cent fall in the market value of both Melrose and GKN since the crucial deadline.

Meanwhile, regulatory filings revealed one of the most revered short sellers has built a material position against the UK turnaround house.

John Paulson, who came to prominence at the height of the financial crisis after earning around $4bn (£2.8bn) by betting against the US sub-prime housing market, has a 0.56 per cent – worth around £23m – short position against Melrose.

US hedgie rival Sand Grove has the biggest bet against the industrial turnaround specialist, holding a 2.74 per cent short position.

While rising short positions would usually signal hedge fund managers expect shares to fall, City sources said some institutions are eyeing an arbitrage opportunity on the assumption the Melrose takeover proceeds. Because Melrose's offer comprises a share and cash deal, there is an opportunity for funds to make a profit by buying GKN shares and shorting Melrose.

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Hours after Melrose appeared to have claimed victory, business secretary Greg Clark said the government will launch an assessment on whether the takeover would pose security concerns due to GKN's involvement in the manufacture of military aircraft.

And it was reported earlier today the government is considering clamping down on short-term investors influencing crucial M&A votes. Clark is preparing to overhaul voting rules, the Daily Mail reported on Monday. However, Whitehall sources subsequently played down such suggestions, telling City A.M. no such plans were in place.

Last week, GKN was dealt a blow by ratings agency Moody's as it placed the FTSE 100 firm on review for a downgrade.

"Our review for downgrade stems from the takeover bid of Melrose, which has now been accepted by the majority of GKN's shareholders, and the related uncertainties about GKN's future shareholding structure, capital structure and business profile", said Moody's senior credit officer Matthias Heck,

"GKN's rating is already weakly positioned on a standalone basis. Our review will focus on the impact of Melrose as GKN's future main shareholder, which will depend on the final acceptance level of the bid, the proposed refinancing measures of GKN's debt by Melrose, and GKN's future business profile."

Melrose and Paulson have been approached for comment.

Read more: The government has warned it may block Melrose's takeover of GKN

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