Fresh blow to EFM as Hermes pulls out of the bidding

Edinburgh fund Managers, which manages £10bn of assets, lost a second bidder in as many weeks yesterday after Hermes abandoned plans to buy the troubled Scottish group.

The announcement caused EFM's shares, which have been inflated in recent weeks on the hope of a takeover deal, to drop 16 per cent to 462.5p.

Hermes, the giant fund management group which is owned by the British Telecom pension scheme, decided to end talks because it was concerned that EFM's biggest client would withdraw £1.2bn of assets if the deal went through.

Edinburgh Investment Trust, the client, said that if Hermes bought the fund, it would have to re-tender for the business along with rivals.

Hermes, which owns 29 per cent of EFM, indicated it was not prepared to participate in a "beauty parade" without radically reducing the sum it would pay for EFM. The decision led to an impasse between Hermes and EFM about the price for the business.

EFM said it was "disappointed" by Hermes' decision. It had already received a blow two weeks ago, when Commonwealth Bank of Australia ended talks about making a rival bid.

EIT was able to tell Hermes that it would have to fight for its business because the trust enjoys a provision in its contract that if EFM changes hands, EIT would have the automatic option of removing its money without incurring any financial penalty.

Lord Eglinton, the chairman of EIT, said: "We did not think that our contract should be sold along with our managers. We want to decide for ourselves who is going to be our manager."

EIT also negotiated a shortening of its notice period with EFM from one year to three months when it became very unhappy with the fund's performance last October. EIT was reluctant to give this right up under a change of management.

The unravelling of the talks leaves EFM vulnerable to a new bid. The City believes that the fund is too small to continue as an independent entity. Hermes is also expected to make a move on another fund as it wants to expand from institutional investment to retail fund management.