Hedge-Fund Shorts Show TUI May Have Overshot on CEO Vow

Bets against TUI AG are at a two-year high after the owner of Europe’s largest tour operator rose to its highest price since 2008 while investors wait for a turnaround program to boost earnings.

Short interest climbed to 20 percent of TUI shares outstanding, the most since December 2011, according to data compiled by Bloomberg and Markit, a London-based research firm. Hedge fund CQS UK LLP is shorting 5.61 million shares, or 2.22 percent of TUI’s stock, according to a Feb. 13 filing. That’s the most recent short position, data compiled by Bloomberg show. Pine River Capital Management is shorting 1.97 million shares, according to a Jan. 30 filing.

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.

Short Interest

TUI’s short interest level of 20 percent of shares outstanding compares with an average of 2 percent for companies in the Stoxx Europe 600 Index, data compiled by Bloomberg and Markit show.

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

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, or to hedge another position. New European Union rules for increasing transparency force investors selling securities short to report transactions above 0.1 percent of a company’s issued share capital and publicly disclose positions higher than 0.5 percent. They do not require investors to spell out their reasons for shorting.

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 Travel

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

“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. He recommends clients to accumulate the shares and has a 12-month price estimate of 15 euros on the stock. “While Joussen has said he is currently not pursuing this, simplifying the corporate structure obviously makes sense.”

The most heavily shorted stock in the Bloomberg European Travel Index for which such data has been made public is Melia Hotels International SA. About 9.47 percent of the Spanish hotel manager’s outstanding shares are shorted.

In the wider Bloomberg European 500 Index, Ingenico 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.

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