Burger King Bears Surge Amid Tim Hortons-Deal Anxiety

By Inyoung Hwang and Leslie Patton 

Investors concerned that tighter U.S. rules for cross-border deals will kill Burger King Worldwide Inc.’s merger with Tim Hortons Inc. (THI) are flocking to the options market.
Bearish contracts on the Whopper maker cost the most ever versus bullish bets as trading in the options surged. Short interest (BKW) on Burger King, which agreed in August to buy the Canadian coffee-and-doughnut chain for $11 billion, has jumped fivefold since the deal was announced.
The acquisition would move the Miami-based company’s corporate headquarters to Canada, where the federal tax rate is lower. While the announcement spurred a
stock surge, three of eight tax-inversion deals have fallen through since the U.S. Treasury’s September notice about tightening rules to make such mergers more difficult.
“The option market is accounting for increased uncertainty surrounding cross-border deals with potential tax benefits,” said Alex Kosoglyadov, vice president of equity derivatives at BMO Capital Markets in New York. “Skew in Burger King options is at its all-time high, suggesting investors may be nervous about the deal with Tim Hortons closing,” he said, referring to the price relationship between puts and calls.

Photographer: Daniel Acker/Bloomberg

An employee assists a customer at the drive-through of a Burger King Worldwide Inc.... Read More

AbbVie, Shire

Political pressure from U.S. lawmakers has put the brakes on several acquisitions. AbbVie Inc. (ABBV) and Shire Plc agreed this week to terminate what would have been the biggest U.S. tax inversion. AbbVie’s skew surged to a record on Oct. 15 after it said it was considering scrapping the purchase of the Dublin-based drugmaker.
Options trading on Burger King has surged since August. An average of 7,800 contracts changed hands daily since the deal was announced, compared with fewer than 500 in 2014 before then, data compiled by Bloomberg show. Puts hedging against a 10 percent slump cost a record 17 points more than calls pricing in a 10 percent rally on Oct. 15, according to three-month implied-volatility data.
The increase in bearish options trading could be because investors prefer using them, rather than shorting the stock, said Janna Sampson, co-chief investment officer at OakBrook Investments LLC. In a short sale, traders sell borrowed stock in bets that the price will fall, allowing them to buy back the shares at a lower price and pocket the difference.

People Gambling

“There might be some people gambling on that,” Lisle, Illinois-based Sampson said, referring to a potential failure of the deal. OakBrook oversees more than $2 billion and owns shares of Burger King’s rival McDonald’s Corp. “It would be cheaper, as well as logistically easier, to short it with options.”
Burger King is among the most-expensive stocks to short in the Russell 1000 Index. The cost to borrow shares is rated a 6 by Markit, with 10 being the most expensive. Short interest on Burger King has climbed to a record 6.8 percent of shares outstanding, the research firm’s data show.
Burger King executives said in August that the company will still buy Tim Hortons if tax laws change. Warren Buffett, whose Berkshire Hathaway Inc. is backing the purchase, has said that the deal isn’t motivated by taxes.
Profit excluding some items will climb 15 percent in the third quarter, as revenue will grow for the first time since the company returned to the market two years ago, according to the average analyst estimate in a Bloomberg survey.
Burger King was taken private in 2010 by investment firm 3G Capital Inc. and resumed trading after completing a merger with a company co-founded by Bill Ackman.

Changes Made

“Burger King faces headwinds, but the efforts to run this brand tend to be about profitability -- reducing expenses and focusing on the bottom line,” Darren Tristano, an analyst at restaurant research firm Technomic Inc. in Chicago, said by phone. “Because of the changes they’ve made after the ownership switch, the investor interest and the deal with Tim Hortons to bring taxes down will strengthen the financial performance.”
Still, traders prefer to hedge. Of the eight most-owned Burger King options, six were bearish, according to data compiled by Bloomberg.
The company declined to comment on the options trading, according to Christopher Beattie, a spokesman from Brunswick Group LLC. So did Scott Bonikowsky of Tim Hortons.
It’s a tough time for the fast-food industry, and Burger King’s smaller size may make lowering costs more difficult, according to OakBrook’s Sampson. Burger King has about 13,800 restaurants worldwide and will have more than 18,000 if it combines with Tim Hortons. McDonald’s has 35,600 globally.
“They’re at a disadvantage in being able to source their ingredients as cheaply,” Sampson said in an interview. “Burger King doesn’t have the size to compete on a cost basis effectively with McDonald’s.”