Burger King Worldwide Inc., Market Cap (as of 19/09/2014): $10.96bn
Tim Hortons Inc., Market Cap (as of 19/09/2014): $11.75bn
Burger King, the US-based fast food restaurant chain, joined the list of the controversial tax-avoiding companies when on August 26 it formally reached an agreement for acquiring the Canadian coffee maker Tim Hortons Inc., which allows Burger King to benefit from the lower Canadian corporate tax rate. The combined entity will list on both New York stock exchange as well as Toronto Stock Exchange and is set to generate $23bn in sales with its 18,000 restaurants in over 100 countries. As a result, these two brands will become the third largest Quick Service Restaurant (QSR), surpassed only by McDonald’s and Yum! Brands. Indeed, the QSR Sector is still heavily dominated by McDonald’s restaurants both in US and globally with $89.1bn in global system sales, while Subway holds the highest number of franchises. Not considering the acquisition, Burger King has $16.3bn of global system sales and positions fourth, as Subway outperformed it by $1.8bn.
Thanks to the merger Burger King is likely to reinforce its presence in the growing breakfast segment, where it has struggled behind both McCafé and Starbucks. Meanwhile, Tim Hortons will be able to leverage on Burger King’s international platform to expand its operations globally. Moreover, the transaction is expected to generate significant synergies on the supply side as well as to improve both parties’ efficiency thanks to global shared services.
According to the agreement, Tim Hortons shareholders are to receive, per each share, C$65.50 in cash along with 0.8025 of merged company common stocks, or, as an alternative, either C$88.50 in cash or 3.0879 common stock of the new company. The default mixed transaction represents an offer price of C$89.32 for a total consideration of $11.4bn and, based on Burger King’s unaffected closing stock price as of August 22, a 39% premium on the volume weighted average price of the previous 30 days before the announcement.
In order to carry out the deal Burger King can count on a $12.5bn financing package ($9.5bn of which provided by JP Morgan and Wells Fargo). Interestingly, Berkshire Hathaway takes part in the deal with $3bn of preferred equity financing without management rights but with a notable 9% return. The deal exposes Warren Buffett to heavy criticisms related to the dubious tax-driven nature of the deal. In fact, the debate surrounding the transaction as a means to perform a tax inversion is particularly interesting, as it comes at a time where the maneuver has become increasingly common. A “tax inversion”, or otherwise known as a “corporate inversion” is a strategy by which a firm relocates its headquarters to a different country with lower tax rates and corporate governance requirements, while still maintaining the bulk of its operations in the original country. Merging with or being acquired by a foreign business typically does this. For companies that either hold a large amount of cash overseas, or generate a large proportion of profits abroad, this strategy allows them to circumvent expensive taxation that would be levied on profits made abroad, or cash being repatriated.
Ever since the proposed merger of Pfizer and AstraZeneca this year, which drew a large amount of criticism from the media for being a plot to conduct a tax inversion, there has been a rush of companies seeking to implement the same strategy, in particular from American companies (notable examples are Medtronic and Liberty Global acquisitions of Covidien and Virgin Media, respectively).
The main reasons for this rush can be attributed to two main factors. Firstly, with interest rates at record lows in US and Europe, it has become cheap for companies to acquire each other or conduct mergers. This general spurt in M&A activity has therefore also led to more activity that can be labeled as attempts to conduct tax inversions. The second factor relates more directly to the political environment in Washington. Because of political clashes between republican and democratic parties, very few crackdowns on tax inversions have occurred recently. This has pushed firms to be bolder, and to attempt inversions under less wholesome pretexts then we have seen over the last decade.
Nevertheless, political resolve is forming. Obama, as well as Treasury Secretary Jack Lew have already publicly denounced the act as being unpatriotic, and a form of “corporate desertion”. With anti-inversion legislation forthcoming, many CEOs have jumped in at the last moment in the hope to beat policy makers and save millions in the process for their shareholders.
However, in the case of Burger King and Tim Hortons it becomes less clear if we are dealing with an outright tax inversion. Despite the relocation to a lower tax-paying domicile the deal makes, as aforementioned, a great deal of sense for Burger King’s business strategy and expansion plan and does not involve any of the elaborate tax-avoiding practices of other firms such as Facebook, which employs a “double-Irish” strategy.
After the news, price of Burger King shares soared 19.51% up to $32.40 while Tim Hortons rose 18.91% up to C$74.72 per share on the following Monday reflecting a genuine support by investors for the deal.
The transaction is expected to be completed no later than early 2015, as it is still subject to customary closing conditions as well as regulatory and shareholder approvals.
Burger King appointed Lazard, JP Morgan and Wells Fargo as financial advisors while Citi and RBC Capital Markets advised Tim Hortons.
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