Shareholders reveal concerns over deal to acquire First Horizon
A day before the Canadian lender's annual general meeting, hedge fund bets on TD Bank Group (TD.TO) reached $6.1 billion on Wednesday, up 45% from 14 days earlier, according to calculations made by data provider ORTEX.
The transaction has come under scrutiny since the failure of U.S. regional lenders Silicon Valley Bank and Signature Bank last month, and some shareholders have called on TD to drop the deal or renegotiate its $13.4 billion acquisition of US lender First Horizon (FHN.N).
"I don't think it's something TD should go ahead with in this environment," said Barry Schwartz, portfolio manager at Baskin Financial Services, a shareholder in TD, in a report by Reuters.
Even TD's shareholders who are in favour of pushing through with the acquisition insist the company shouldn't pay the asking amount.
"I think this gives them an opportunity to be in the driver's seat, to renegotiate at a lower price," said Ben Jang, a portfolio manager at Nicola Wealth.
"I think that short interest was elevated by arbitrage investors betting on the (First Horizon) deal ... suggesting that the market believes that the deal is at risk of closing," said James Shanahan, an analyst at Edward Jones.
By purchasing shares of the target company and short selling the stock of the acquirer, so-called "arbitrage investors," many of whom are event-driven hedge funds, wager on mergers and acquisitions.
"I think the biggest factor is noise around closing of First Horizon and what TD could be paying for it," said Lemar Persaud, an analyst at Cormark Securities.
Given that TD has large retail operations, Persaud said that the collapses of SVB and Signature Bank are a factor. At its annual general meeting (AGM) on Thursday in Toronto, TD, which is seeking for , is anticipated to discuss the $13.4 billion merger.
The data indicated that hedge funds were shorting around 5.5% of TD's outstanding shares while only shorting $2.9 billion, or 1.2%, of Bank of America (BAC.N), the second-most shorted bank stock. Short selling, often known as borrowing a stock from an institutional investor and selling it back when the price drops while keeping the difference, is profitable for hedge funds.
Since the start of the regional banking crisis in the US, TD shares have down 0.1%, but gained 3.4% this week. Both Bank of Montreal (BMO.TO) and Royal Bank of Canada (RY.TO) have exposure to the U.S. financial system, but ORTEX data shows that their outstanding share loans were around $2.1 billion and $2.2 billion, respectively.
A TD representative declined to comment to Reuters.
