Burger King/Tim Horton’s Merger Puts Options Market In A Bearish Mood

The Burger King/Tim Horton’s deal is having repercussions throughout the financial world.

More and more people are buying into the Burger King/Tim Horton’s merger. And, they are expecting stock prices to go up. Short interest on Burger King (BKW), which agreed in August to buy the Canadian coffee-and-doughnut chain for $11 billion, has jumped five times tie original price, according to Bloomberg.

The acquisition would make Canada new corporate home, where the federal tax rate is lower. While the announcement spurred a stock surge, other mergers are not having as much luck. Since the U.S. Treasury’s tightening of rules in an effort to arrest any mass business moves for tax inversion, three of eight pending mergers are either in limbo or have fallen apart since the 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 Horton’s closing,” he said, referring to the price relationship between puts and calls.

Burger King shares rose 3.2 percent to $31.55 at 12:15 a.m. in New York today.

Since the merger announcement, options trading on Burger King has surged. 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 October 15, according to three-month implied-volatility data.

Nation’s Restaurant News is reporting, however, that Burger King and Tim Horton’s is proceeding as if the merger has no issues.

There are plenty of reasons the Miami chain wants the merger to succeed. Whether the tax incentive issue is or is not a reason, building an international name and improving the only growing portion of daily restaurant business (breakfast) are the two most important reasons.

This is an area that Burger King has long been suffering. It is an area that Tim Horton’s excels at, and can help Burger King.

Breakfast is the only daypart actively adding customers right now. According to NPD Group, breakfast traffic increased by three percent while overall daypart traffic for the entire restaurant industry fell.

Burger King’s nemesis, McDonald’s Corp., is a behemoth in the morning and actually added breakfast sales in the third quarter even while its own sales fell. Taco Bell added breakfast this year. There are a growing number of restaurants that are dedicated to the business of breakfast. Dunkin’ Brands this morning cited this mounting competition in the mornings as it predicted that sales will likely fall below expectations this year.

Fisher speculated that adding Tim Horton’s would enable Burger King to start an in-store coffee shop business, similar to McDonald’s McCafe. Tim Horton’s manufacturing and distribution network enables the company to put a store just about anywhere.

“It’s next to impossible to think that Burger King isn’t going to do a McCafe-type program,” Fisher said.

Such a program, he said, would add a substantial amount to franchisees’ bottom lines, if it’s done right.

[Image courtesy of New York Post]