Engineering a big short: Hedgies build £1bn bet against Melrose

Hedge funds have scrambled to build a £1bn bet against GKN suitor Melrose as Britain’s biggest hostile takeover for almost a decade approaches a critical shareholder vote.

Almost a quarter of Melrose’s shares are on loan to short sellers hoping its pursuit of GKN will fail – figures that have risen sharply in the last few days.

And GKN today landed a further blow in its scrap against Melrose by capturing the support of top shareholder Columbia Threadneedle.

With a 3.4 per cent stake in GKN, Columbia Threadneedle is the largest shareholder to show its hand and come down in favour of GKN’s rationalisation plans. Head of equities Richard Colwell said while he had been “frustrated by the performance of GKN in recent years… the actions set out by the new team at GKN present the best options for shareholders.”

The fund management giant joins Jupiter and Lancaster Capital – which each own around a one per cent slice of GKN – last week said they would also vote against Melrose.

Read more: Melrose lowers GKN shareholder threshold and confirms £1bn pension plug

And with Sanderson Asset Management and Pelham Capital stating over the weekend they opposed the takeover attempt, GKN has now secured the support of almost six per cent of institutional shareholders in less than a week.

Insurance giant Aviva, a one per cent investors in GKN, last week said it would support Melrose.

Shareholders have until 1pm on 29 March to decide on Melrose’s £8.1bn approach.

Between Tuesday and Friday, the number of Melrose’s shares borrowed by hedge funds rose from 16.33 per cent to 23.39 per cent, according to IHS Markit. Melrose has a market capitalisation of over £4.3bn, meaning the short trade has now hit 10 figures.

Davidson Kempner has the largest bet against Melrose, according to regulatory filings, with a 2.55 per cent short interest. The New York hedge fund upped its stake against Melrose last week, with Sand Grove Capital and Halcyon also topping up their bets. AQR Capital Management – which has made headlines with trades against the likes of AA, Capita and Provident Financial – has a short position of 0.89 per cent dating back to August 2016.

Read more: Dana seeks to keep $6.1bn GKN merger on track with London listing