Short Sellers Laying Big-Sized Bets Against Burger King

Burger King’s popular chicken fries are back, but short sellers don’t seem to care.

Short interest in Burger King Worldwide Inc. (BKW)’s stock has surged to 4.6 percent of shares outstanding and 16 percent of its free float, according to data from research firm Markit Ltd. Both figures are the highest on record and more than triple their level on Aug. 22.

The jump in bearish bets corresponds with a 24 percent gain in the stock in six sessions. As tasty as those chicken fries look (holy smokes, not to mention that A.1. Ultimate Bacon Cheeseburger), it’s generally believed the rally is a result of Burger King’s plans to buy Ontario-based coffee-and-doughnut chain Tim Hortons Inc. and move its headquarters to Canada.

“The news was taken positively in the cash market, with the potential tax benefits just one of the upbeat, if politically fraught, aspects gaining traction,” SunGard’s Astec Analytics said in a report. “Astec’s figures suggest short sellers have taken the opportunity to bet against the moves.”

The heightened interest of short sellers comes as criticism grows of the type of deal known as a tax inversion, in which U.S. companies shift their legal address to another country to save on taxes.

‘Unpatriotic’

Some 43 U.S. companies have reincorporated abroad since 1982, including 13 since 2012, and Burger King is one of nine companies planning to join them. Future inversions may cost the U.S. $19.5 billion in lost tax revenue over the next decade, a congressional panel estimated this year.

Even before the company announced the planned deal, inversions had already drawn the ire of President Barack Obama, who ordered a crackdown on the practice and called it an “unpatriotic tax loophole.” Burger King Chief Executive Officer Daniel Schwartz said he doesn’t expect “meaningful tax savings,” but everyone from tax experts to burger eaters on social media are skeptical about the claim.

Among analysts, the average 12-month price estimate for the shares has increased from $27.50 on Aug. 22 to $32 today, but that’s almost 6 percent below where the stock is trading currently. There were three buy ratings before news of the deal broke and three buy ratings now. There are currently six hold ratings and one sell, compared with seven holds and two sells before reports of the deal.

Short Selling

The shares were already somewhat popular with shorts, with bearish bets as a percentage of free float at almost 50 percent above the average stock in the Russell 1000 Index before news of the deal, according to data compiled by Markit and Bloomberg. As of yesterday, they were five times the average.

Short interest on Tim Horton’s Canadian shares rose to an almost eight-year high of 8.2 percent of free float on Aug. 26 and has stayed elevated, ending yesterday at 4.6 percent.

Of course, short interest has been known to increase for companies involved in big acquisitions even if they aren’t inversion deals. For example, bets against real-estate investment trust Ventas Inc. have grown to 2.2 percent of free float from 0.63 percent on June 1 as the company agreed to buy American Realty Capital Healthcare Trust Inc.

Whether the bets against Burger King reflect normal merger-arbitrage trading strategies or speculation the company will back away from the inversion plans, one thing is clear: just like in its fryers, there’s a game of chicken going on with Burger King.

To contact the reporter on this story: Michael P. Regan in New York at mregan12@bloomberg.net

To contact the editors responsible for this story: Lynn Thomasson at lthomasson@bloomberg.net

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