Burger King and Tim Hortons – $11 Billion Buyout Deal

Burger King and Tim Hortons have made the formal announcement of an $11 billion deal for the iconic American brand of fries and Whoppers to acquire the doughnut and coffee shop that has brought with it a signature Canadian distinction. Berkshire Hathaway Inc., owned by billionaire Warren Buffett’s, will be investing in the buyout through preferred stock worth $3 billion.

The buyout will “create the world’s third largest fast-food chain,” according to Burger King, which also expressed its intent to expand the coffee shop outside Canada, while gaining the advantage of becoming a popular breakfast brand. In 2013, Tim Hortons’ sales nearly hit $3 billion and continues demonstrate steady growth.

Now with 670 U.S. and 14,000 in the rest of the globe, Burger King has maintained a stranglehold on American wallets for over 60 years. Tim Hortons, on the other hand, has taken the Canadian pride (and love for coffee) to the United States after conquering 75% of Canada with over 4,500 locations. As the two combine to become one company, customers wonder if both companies will carry on their individual legacies.

Daniel Schwartz, Burger King CEO and principal at 3G Capital, the fast food company’s majority owner, had said there are “no plans to mix the products or do co-branding.”

One of the bigger issues thrown at both companies since the deal made it to the news had to do with worries about it being a “corporate inversion” with the intent of cutting the tax rate for Burger King, the buying party in the deal. Mr. Schwartz cleared up the matter by confirming Burger King’s 27% tax rate would remain “about the same” after the deal.

Should Tim Hortons decide to not honor the $11 billion deal, it will have to pay Burger King $317 million, as provided for in the buyout documents. On the other hand,  On the flip side, Burger King will be required to make a C$500 million settlement with Tim Hortons should the deal fail to obtain regulatory nod.

The New York Times digs into the details, quoting the who’s-who in both camps essentially saying the buyout deal is all for the best:

“This is a phenomenal asset,” Daniel Schwartz, Burger King’s chief executive, said in an interview. “This is a business we can own forever.”

Though 3G had weighed the possibility of a Tim Hortons deal for some time, it and Burger King began formal talks with Tim Hortons earlier this year, according to people briefed on the matter.

For Tim Hortons, led by the chief executive Marc Caira, a merger with a more global counterpart could help fulfill its own international ambitions.

“Tim Hortons should very clearly be a global brand,” Mr. Caira said. “With Burger King and 3G, I can definitely get there faster.”

The Oregonian had pointed out that amidst the hullabaloo, it should be interesting to see how things will turn out for both food service industry players:

Here are four things to watch for:

1. Southern invasion: In the U.S., Tim Hortons could also give Burger King another way to tap into the attractive coffee and breakfast markets, which have been dominated by players including McDonald’s, Dunkin’ Donuts and Starbucks.

2. Global expansion: The international ambitions for Tim Hortons echo the strategy Burger King’s owner, 3G Capital, has applied to Burger King since buying the hamburger chain in 2010. Given Burger King’s struggles in the U.S., the investment firm has focused on opening more locations in countries including China and Russia by striking deals with local franchisees.

3. Breakfast wars: Competition in the mornings has been intensifying. Taco Bell, for instance, recently launched a national breakfast menu and Starbucks revamped and expanded its breakfast offerings. McDonald’s has said it plans to put more marketing muscle behind breakfast to defend its leadership position.

4. No doughnuts with that Whopper: Executives said the two chains will continue to be run independently. That means people shouldn’t expect to see Timbits – Tim Hortons’ miniature doughnuts — alongside Whoppers on Burger King menus.

Photo by CBC.ca

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