The Edinburgh Investment Trust, one of the fund manager's largest clients, has put the contract to manage its £1.4bn of assets out to tender. And while EFM has the opportunity to bid for the business, the uncertainty over the tender has re-opened the door for a possible takeover of the Scottish fund management group.
In March this year, EFM fought off a bid from Hermes Pensions Management to take over the group when Edinburgh Investment Trust announced that the notice period of the management contract with EFM had been reduced from one year to three months.
Edinburgh Investment Trust said that at the time of a change in management of its investments, EFM and other fund managers would be invited to bid for the investment management contract. On the back of this news Hermes terminated its discussions with EFM.
But it is now thought that even with the loss of Edinburgh Investment Trust's business, which is believed to be worth about £4m in revenues to EFM each year, the fund manager may once again become a takeover target.
Bear Stearns, in a research note published this week, upgraded its rating on EFM from neutral to buy. The US bank believes that even if the contract from Edinburgh Investment Trust is lost, EFM is highly likely to be acquired in the near future at a premium to the current valuation.
EFM's share price closed yesterday afternoon (Thursday) at 367.5p. Bear Stearns has a 12 month price target of 450p assuming the group retains management of Edinburgh Investment Trust's contract. If the fund management company fails to retain the contract then it estimates that it has a fair value of between 385p and 395p. At the top end this is a 7.5% premium to EFM's current share price.