Hedge funds are betting that commodities trader Glencore will succeed in its battle for miner Xstrata , in a long-running deal that has been profitable for arbitrageurs and is still attracting funds looking to make money.
Arbs, hungry for action after a lean period for M&A, have been buzzing around the deal for months, attracted by its size, liquidity and complexity, and many profited from last week's move by Glencore to sweeten its now 23 billion pound all-share bid.
Xstrata was expected to recommend the offer as early as next week, although Qatar Holding - its second-biggest investor after Glencore - has yet to make its decision public.
However, after a breakthrough in talks last week, brokered by former British prime minister Tony Blair, many funds believe it is only a matter of time before the deal gets the Qataris' stamp of approval.
"We are quite confident that Glasenberg will close this one once and for all," said Amit Shabi, partner at Paris-based Bernheim, Dreyfus & Co.
"It is quite natural that they (Qatar) stay neutral before Xstrata's statement. We believe that once Xstrata management approves the merger, Qatar will follow smoothly."
Merger arbitrage funds typically buy shares in the target company in a deal and short-sell the acquirer. Short-selling means betting on a lower price by borrowing shares you do not own and selling them in the market, with the aim of buying them back at a cheaper price.
Shabi initially played the deal by reversing the typical merger arbitrage trade and buying Glencore shares and shorting Xstrata, betting the spread between the two stocks would widen.
However, he later reversed this when the high cost of borrowing Glencore shares to short-sell fell, betting the spread would narrow - a move he said was "very lucrative".
Xstrata shares are 7.8 percent higher than before news of Glencore's improved deal, while Glencore shares are down 4.3 percent in the period.
Glencore's offer stands at 3.05 new shares per Xstrata share, up from 2.80 shares.
One fund manager who asked not to be named said he was also expecting a recommended deal on Monday or early next week, adding there was no real reason now for Qatar to block the deal.
A number of hedge funds have been putting on bets since Glencore's improved offer was announced, also buying Xstrata and shorting Glencore, he said.
Another hedge fund sticking with his position said big hedge funds specialising in betting on deals facing antitrust rulings were now getting involved.
"It has been a fantastic deal for hedge funds but especially for those that came in after Qatar stepped in. Those who were holding shares since the very beginning actually lost money."
One headache has been the high cost of borrowing Glencore stock, if funds want to want to sell short, due to its low free float. One hedge fund executive told Reuters the cost was around 10 percent, compared with the usual cost of borrowing a stock of 2-8 percent.
Anne-Sophie D'Andlau, co-founder of Paris-based hedge fund firm CIAM, profited last week from her long Xstrata, short Glencore position, after finding "expensive" Glencore stock to short, and is now watching the cost of borrowing more shares stands before deciding what to do next.
"We were expecting a last-minute agreement and 3.05 is close to our expectations. We think board approval will be finally obtained and that Glencore will be able to complete the transaction in the end," she said.
"We are going to see what we will do with the position. There is still antitrust (approval) to be obtained, in particular in Europe. We will see where the borrow stands, if it stays the same or not. It proves you never know on a deal until the last moment."
(Editing by Dan Lalor)