"We think the offer is not attractive," one Hong Kong fund manager who owns a small stake in Power Assets said. "It all depends on the view Capital takes."
Short positions in CKI shares surged after the deal was announced in early September, suggesting investors are expecting the firm to pay to sweeten the deal. They believe Li will pay more to ensure the success of the merger vote as under Hong Kong's takeover law just 10 percent of the target company's independent shareholders can vote down a deal.
But U.S. money manager Capital Group, which as per latest filings owns 7.2 percent of Power Assets, may not play along, because the move would be detrimental to its interests.
That's because Capital is also the biggest independent shareholder in CKI with an 8 percent stake. Within Capital Group, American Funds' EuroPacific Growth Fund and Capital Income Builder hold the biggest chunk of the two companies, meaning there's no incentive for them to support a higher CKI bid for Power Assets.
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"It's a value-neutral deal for Capital and hard for them to justify a fight. I think people relying on Capital's support will be in for a shock," said a Hong Kong-based hedge fund manager who declined to say whether he has a position in either of the two companies.
Mutual funds of Capital, which manages more than $1.4 trillion, and other large asset managers also tend to side with management, preferring to sell out rather than fight if they are not in agreement. Capital's funds sided with Li, according to the Wall Street Journal, in a vote in May which had sought to allow Power Assets to buy CKI bonds, a resolution that was defeated.
A London-based spokesman for Capital declined to comment. CKI and Power Assets did not respond to requests for comment.
CKI stocks on loan, an indicator of how heavily the stock is being shorted, surged to 61 percent on Sept. 17, the highest level in at least three years, from just 4 percent on Sept. 9, which compared with the Hong Kong market average of about 20 percent, data from Markit showed. Borrowed shares have declined to 47.4 percent on Sept. 24, the data showed.