Hedge Fund Buys Big Chunk of MF Global

Tables: Buyers | Sellers

LAST MONTH MF Global saw rumors of liquidity problems drive its stock down almost 90% from its highs, but one hedge fund has snapped up nearly 10 million of the brokerage firm's beaten-down shares.

On Thursday Jana Partners disclosed that it now owns 9,885,753 shares, or an 8.2% stake in the Hamilton, Bermuda-based company. Jana is now MF Global's third-largest holder.

At the end of the fourth quarter Jana did not show a stake in MF Global.

Jana indicated April 7 as the date which it reached the ownership level triggering the filing. Jana filed as a passive investor.

Jana, which has about $8 billion in assets, was launched in 2001 and is managed by founder Barry Rosenstein.

A spokesman for New York-based Jana declined to comment on the stake.

A spokeswoman for MF Global declined to provide a comment.

"We found it very interesting that Jana, which is a known activist investor, has taken a passive stake -- though of course that could change at any point in the future," says Lon Juricic, president of StreetInsider.com.

"MF Global has had some serious problems recently," says Juricic. "There was a rogue trader and very damaging rumors of liquidity issues. The company denied it, but people believed that it was going to be another Bear Stearns and clients began walking away and pulling their money. There was no solid information, but it completely obliterated the stock, though it's since recovered."

MF Global fell five cents to $12.83 on Tuesday.

Shares fell to a 52-week intraday low of $3.64 on March 17, an 88.7% decrease from their late-December high of $32.20. While the Dow Jones U.S. Investment Services Index has lost 20% since the beginning of the year, MF Global is off more than 59%.

"Jana has seen an opportunity with all the misinformation to load up on the stock," says Juricic. "They obviously feel the company's franchise is strong, it can weather the storm and has good longer-term value. It definitely has some issues to work though."

In late February MF Global had to liquidate wheat contracts for a $141.5 million loss after discovering its entry-order system failed to stop a rogue trader at its Memphis, Tenn., branch.

The company has sought to improve its liquidity position and is also exploring the possible sale of a stake in the world's largest retail futures brokerage.

MF Global has retained investment bank Lazard to find a solution for the $350 million of outstanding borrowings that mature in June under a bridge loan. Another $1 billion of the bridge loan was extended until December.

MF Global plans to report fiscal fourth-quarter and full-year earnings the week of May 12. On Friday the company said it expected fiscal fourth-quarter losses of $55 million to $65 million, mostly stemming from bad-debt provision.

On Monday, shares of MF Global retreated as a number of analysts lowered their estimates for the stock.

"While we believe MF Global can continue operating as a going concern, we are concerned that today's figures suggest market share losses, and that future quarters are likely to be weaker than previously expected," wrote Deutsche Bank analyst Rob Rutschow in a research note Friday.

Rutschow lowered his fiscal 2008 fourth-quarter estimate to a loss of 48 cents per share from a loss of nine cents per share. He has a Hold rating on MF Global, but lowered his target price to $17 from $27.

Analysts polled by Thomson Financial on average rated MF Global at Buy or the equivalent.

"It's obviously good news that there is at least one institution betting on this significant drop," wrote Joshua Hong, director of research at OwnershipAnalyzer.com in an e-mail to Barron's Online.

However, Hong notes that institutional ownership data are likely to be volatile. "As there was a major crisis during the first quarter, I expect there will be huge institutional turnover in the first and second quarters," he wrote.