Hedge Funds Short TUI as Shares Rise to Highest Since ’08

Hedge funds have added short positions in TUI AG (TUI1) in the past month, after the owner of Europe’s largest tour operator rose to its highest price in more than five years, as investors wait for a turnaround program initiated by its chief executive officer to boost earnings.

London-based hedge fund CQS UK LLP is shorting 5.61 million shares, or 2.22 percent of TUI’s outstanding stock, according to a Feb. 13 filing. That’s the most recent short position, data compiled by Bloomberg show. Pine River Capital Management indicated in a Jan. 30 filing that it is shorting 1.97 million shares. Those represent about 41 percent of the declared outstanding short positions as of today.

TUI shares have gained 49 percent in the past six months, more than double the 19 percent gain in the 37-member Bloomberg European Travel Index, as investors bet CEO Friedrich Joussen will improve profitability and turn the company into a stable payer of dividends. Joussen took over a year ago from Michael Frenzel, who had led TUI for 19 years, a period investors have mocked as two lost decades.

“Joussen has presented the right plan, but he must now also prove it works,” Jochen Rothenbacher, an analyst at Equinet Bank AG in Frankfurt, said. “The shares have anticipated a lot already, and after such a run, some short positions are not unusual.”

Joussen has pledged to improve ailing hotel brands and turn the loss-making cruise operations around, asking shareholders for patience as he plans to fix assets before considering what to sell. TUI has sold five hotels this year and last from a portfolio of more than 200, and said it will stop offering river cruises from next year.

Turnaround Skepticism

When explaining the turnaround plan, he encountered “a certain level of skepticism in every discussion with investors that I have had,” Joussen told shareholders at the company’s annual general meeting in Hanover on Feb. 12.

TUI reiterated its full-year sales and earnings forecasts on Feb. 12 after trimming its first-quarter loss as an increase in holidaymakers to the Canary Islands offset lower occupancy in Egyptian hotels.

About 7.4 percent of TUI’s outstanding shares have been sold short, with the CQS position from Feb. 13 also being the biggest on record, data compiled by Bloomberg show. The bets make TUI the stock with the second-highest proportion of declared short positions in the Bloomberg travel gauge.

TUI spokeswoman Natascha Kreye declined to comment on the short positions in the company’s shares.

Decline Bets

Investors borrow shares to short in expectations of a price decline, hoping to buy them cheaper at a later date and cash in the difference. New European Union rules for increasing transparency oblige investors selling securities short to report transactions above 0.1 percent of a company’s issued share capital and publically disclose positions higher than 0.5 percent.

Of 21 analysts tracked by Bloomberg covering TUI, 13 recommend investors buy the shares, with four advising to hold them and four to sell them, according to data collected by Bloomberg. The average 12-month price estimate is 14.32 euros. Shares rose to 13.85 euros, their highest price since September 2008, by the close of trading in Frankfurt on Feb. 17.

TUI dropped a plan to merge with TUI Travel (TT/) Plc a year ago after concluding it would not benefit its shareholders. TUI owns 54 percent of TUI Travel AG, according to data compiled by Bloomberg.

TUI Travel

“In the past, some hedge funds have shorted TUI while going TUI Travel long, a strategy that makes sense when you expect a takeover approach from TUI for the outstanding TUI Travel shares that would include a premium paid,” Rothenbacher said. “While Joussen has said he is currently not pursuing this, simplifying the corporate structure obviously makes sense.”

Rothenbacher recommends clients to accumulate the shares and has a 12-month price estimate of 15 euros on the stock.

The most heavily shorted stock in the Bloomberg European Travel Index for which such data has been made public is Melia Hotels International SA. (MEL) About 9.47 percent of the Palma de Mallorca, Spain-based hotel manager’s outstanding shares are shorted.

In the wider Bloomberg European 500 Index, Ingenico (ING) SA is the most heavily shorted stock, according to data compiled by Bloomberg. About 15 percent of outstanding shares in the French provider of payment terminals and services are shorted.

To contact the reporter on this story: Richard Weiss in Frankfurt at rweiss5@bloomberg.net

To contact the editor responsible for this story: Benedikt Kammel at bkammel@bloomberg.net

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