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Hedge funds hot - but not too hot - for Nova Chemicals

Date: Wednesday, February 25, 2009
Author: Andrew Willis, Globe and Mail

The hedge fund crowd jumped on Nova Chemicals yesterday, thrilled to invest in a takeover, but pessimistic that a bidding war will begin for the chemical company.

Despite heavy trading yesterday, the price of shares in Nova never came close to the $6 (U.S.) a share cash offer from Abu Dhabi state-owned oil company International Petroleum Investment Co. (IPIC).

In the wake of this bid, Nova shares closed at $5.21 on the New York Stock Exchange, a discount to IPIC's offer that reflects the possibility that this friendly deal might not close, as expected, by April. There are risks on the regulatory front - Ottawa must sign off - and two-thirds of shareholders must give a thumbs-up.

It's worth noting that Nova stock closed Friday at $1.12, reflecting a widely held view that the company could file for bankruptcy protection this week. This is one deal that didn't leak.

Given the bleak state of both credit and chemical markets, and the discount on Nova's share price, the hedge fund crowd is signalling there's little chance IPIC will face a rival bidder. Even the prospect of another offer would have Nova shares changing hands at a price much closer to $6.

However, the volume of trading yesterday showed Nova has become an instant favourite with hedge funds that bet on takeovers. The dearth of deals made these portfolio managers idle, and they jumped at an opportunity to put capital to work yesterday. There are just 81 million Nova shares outstanding and, on the NYSE, 34.9 million Nova shares changed hands, while 21.6 million shares crossed on the Toronto Stock Exchange.

UBS Securities and RBC Dominion Securities worked with Nova on this deal, with legal advice from Osler Hoskin & Harcourt and U.S. law firm Wachtell Lipton Rosen & Katz. Across the table, HSBC is acting as exclusive financial adviser to IPIC, along with law firms Torys and Clifford Chance.