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Burger King to Buy Tim Hortons for About $11 Billion

By Leslie Patton and Craig Giammona
August 26, 2014 4:38 PM EDT 120 Comments
A Tim Horton's cafe in New York City on Aug. 25, 2014.
Photographer: Spencer Platt/Getty Images
A Tim Horton's cafe in New York City on Aug. 25, 2014.

Burger King Worldwide Inc. (BKW) agreed to acquire Tim Hortons Inc. (THI) for about C$12.5 billion ($11.4 billion) in a deal that creates the third-largest fast-food company and moves its headquarters to Canada.

Tim Hortons investors will receive C$65.50 in cash and 0.8025 a share of the combined entity for each share they own, the companies said in a statement today. The transaction, which is backed in part by Warren Buffett’s Berkshire Hathaway Inc. (BRK/B), values each Tim Hortons share at C$94.05, based on Burger King’s closing price yesterday.

The purchase brings Burger King the biggest seller of coffee and doughnuts in Canada, which it can use to grow internationally. The deal also lets the burger chain push into the grocery business by selling packaged coffees at supermarkets in North America. The combined business would create a fast-food network with $23 billion in sales, including franchisees, and more than 18,000 restaurants in 100 countries.

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“There’s value to be extracted and there are international growth opportunities,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas. “I think it’s going to be a well-received deal.”

The acquisition also moves the merged entity’s global headquarters to Canada, potentially taking advantage of lower corporate taxes. When the companies disclosed the talks on Aug. 24, it heightened debate over American businesses shifting to other countries in search of lower tax bills. President Barack Obama criticized the practice in July, and his aides said that the administration would take action to stop the trend.

Stock Gain

How Companies Buy Tax Breaks

The merger talks sent shares of both companies soaring yesterday. Burger King rose 20 percent, the biggest jump since the stock debuted on the New York Stock Exchange two years ago. It retreated 4.3 percent to $31 today. Tim Hortons climbed 19 percent yesterday and an additional 8.1 percent today, rising to C$88.71 in Toronto. Based on the value of the shares last week, before reports of the deal surfaced, the transaction offers a 30 percent premium to Tim Hortons’ shares.

Tim Hortons shares are trading below the deal price because investors see a risk that the government may move to blunt the tax savings, said Stephen Anderson, a New York-based analyst at Miller Tabak & Co.

“It’s a political concern; it’s nothing that will derail the deal in my view,” he said.

3G Capital

3G Capital, the investment firm that owns about 70 percent of Burger King, will convert that stake into roughly 51 percent of the new company. Berkshire Hathaway has committed $3 billion of preferred equity financing, according to the statement. Berkshire will earn 9 percent annual interest on its investment, which allows the company to deepen its relationship with 3G. Omaha, Nebraska-based Berkshire won’t participate in managing the restaurant business.

3G, which was co-founded by Brazilian billionaire Jorge Paulo Lemann, joined Buffett last year in a $23.3 billion takeover of HJ Heinz Co. Buffett bought half the ketchup maker’s common stock for about $4.25 billion and invested $8 billion for preferred shares that pay a 9 percent annual dividend and gave Berkshire warrants to buy an additional 5 percent stake.

Lemann’s firm is known for making cost cuts at the businesses it acquires, including Heinz. After 3G’s takeover, the ketchup company embarked on a plan to fire more than 1,000 workers and close plants in North America, though a group of Ontario investors said in March that they would keep open a Canadian tomato-juice factory.

‘Magnificent Job’

“3G does a magnificent job of running businesses,” Buffett said in May at his company’s annual meeting in Omaha. “We’re very likely to partner with them, perhaps on some things that are very large.”

Burger King, the second-largest U.S. burger chain, has struggled to boost North American same-store sales and compete with McDonald’s Corp. (MCD)’s breakfast fare. Buying Tim Hortons would give Burger King a coffee brand that’s coveted by Canadians, as well as some Americans. There are no current plans to combine brands or sell Tim Hortons coffee at Burger King, the companies’ executives said today.

Burger King plans to help expand Tim Hortons restaurants in the 98 countries where it operates. There may be supply-chain, marketing and administrative cost savings as well.

Separate Chains

Within the new parent company, the two chains will remain stand-alone businesses and maintain their current headquarters. Burger King is run from Miami, while Tim Hortons is based in the Toronto suburb of Oakville.

Daniel Schwartz, Burger King’s chief executive officer, will become group CEO of the merged company, as well as remaining head of the fast-food chain. Tim Hortons CEO Marc Caira, meanwhile, will continue to run that chain, which has about 4,500 locations. Alex Behring, a managing partner at 3G who has served as Burger King’s executive chairman, will continue in that role for the new global company.

Schwartz said he will spend the majority of his time in Canada and still have a desk in Miami. The new global headquarters of the two companies will house functions such as accounting, legal, human resources and corporate strategy. For now, no one at either company will be losing their jobs, Schwartz said in an interview.

“We don’t have any planned layoffs,” Schwartz said. “But we do expect there to be some overlap and some synergies with these two companies.”

Tax Rates

The Canadian corporate tax rate is typically 26.5 percent, compared with 40 percent in the U.S., according to auditing and tax firm KPMG. Still, Burger King already pays a lower rate because it operates in a mix of tax jurisdictions. Its effective tax rate in 2013 was 27.5 percent.

Schwartz said today on a conference call that the company didn’t expect its tax rate to change materially.

“This transaction is not really about taxes,” he said. “It’s about growth.”

Even if U.S. tax laws changed, Burger King would still want to acquire Tim Hortons, Schwartz said in the interview.

Burger King has lined up $12.5 billion in financing to fund the cash portion of the deal, including $9.5 billion from a debt package led by JPMorgan Chase & Co. and Wells Fargo & Co.

Lazard, JPMorgan and Wells Fargo served as Burger King’s financial advisers, while Kirkland & Ellis LLP, Davies Ward Phillips & Vineberg LLP and Paul, Weiss, Rifkind, Wharton & Garrison LLP provided legal counsel. Tim Hortons received financial advice from Citigroup Inc. and RBC Capital Markets. Wachtell, Lipton, Rosen & Katz and Osler, Hoskin & Harcourt LLP served as legal counsel.

Name Recognition

One challenge will be promoting the Tim Hortons brand outside of Canada. Only about 30 percent of Americans are familiar with it, according to YouGov BrandIndex.

If Burger King ultimately decides to sell Tim Hortons coffee in its U.S. restaurants, the company will have to find a way to make it resonate, said Peter Saleh, a New York-based analyst at Telsey Advisory Group.

“People here don’t really know the Tim Hortons name,” he said. “I’m not sure that it’s really going to help them much.”

Burger King said it was committed to Canada and wouldn’t change the way Tim Hortons operates, aiming to reassure consumers that one of the country’s most beloved brands wasn’t in jeopardy. Tim Hortons, which claims to sell eight out of 10 cups of coffee in Canada, was founded by Hall of Fame Toronto Maple Leafs hockey defenseman Tim Horton in 1964.

Still, this isn’t the company’s first time being acquired by an American burger chain. Wendy’s Co. bought Tim Hortons in 1995 and then spun it off as a public company in 2006.

“Our customers, employees, franchisees and fellow Canadians can all rest assured that Tim Hortons will still be Tim Hortons following this transaction,” Caira said in the statement.

To contact the reporters on this story: Leslie Patton in Chicago at lpatton5@bloomberg.net; Craig Giammona in New York at cgiammona@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Bruce Rule

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