The US hedge fund QVT Financial raised its stake in Punch Taverns to seven per cent yesterday, as it stepped up its attempts to derail the pub company's proposed £4bn merger with Mitchells & Butlers (M&B).
Fund manager Lars Bader fears the offer, which includes a £175m cash sweetener to M&B shareholders, would dilute Punch's earnings.
Mr Bader said Punch was already undervalued.
"Its share price represents only half of what it is worth which means that you are paying twice as much as you should be," he said.
The only shareholders who would consider this offer are those that are investors in both companies, he added. "It makes no sense to me," he said.
"The only reason it has any momentum at all is because there are overlapping shareholders. Any shareholders who don't own M&B should take a careful look at this and make their views known."
Mr Bader said that although there would be synergies from a tie-up, there would not be enough to justify the offer.
QVT, the fourth largest shareholder in Punch, was spun out of Deutsche Bank in 2003. Analysts at Dresdner Kleinwort have said the offer "gives an equity split of 53 per cent to M&B shareholders and 47 per cent to Punch shareholders". They added: "The price looks relatively generous given we see few alternate bidders emerging and M&B contributes 40 per cent of pre-synergy profit before tax." US private equity firm Blackstone is understood to be looking at M&B although the lack of cheap debt would make such a deal difficult.
CVC Capital and KKR have both been named as potential partners to Blackstone. Shareholders in M&B, which includes entrepreneur Robert Tchenguiz, were hoping for a profitable exit from the group after seeing its share price tank after a planned property venture fell through.
Analysts have said M&B would not have considered a tie-up were it not for the £391m in losses following the collapsed property deal.
Punch owns about 8,500 pubs while M&B has 2,000 outlets with food making up about 20 per cent of sales.
If a deal went ahead, Punch is proposing its chief executive, Giles Thorley, tohead the new company, while M&B's chief executive, Tim Clarke, would be non-executive chairman.