Article
Burger King, Tim Hortons seal merger deal
Despite early media reports, executives from both brands insist their M&A agreement is not about a tax inversion.
August 26, 2014 by Alicia Kelso — Editor, QSRWeb.com
One of the QSR segment's largest M&A deals ever was officially announced this morning. The board of directors from Burger King and Tim Hortons unanimously approved a definitive agreement that combines the two brands' infrastructure while maintaining separate brand identities.
As part of the agreement, 3G Capital, the private equity company that purchased Burger King in 2010, will own approximately 51 percent of the new company. The merged company will be headquartered in Canada, while each brand will maintain their respective headquarters in Oakville, Ontario (Tim Hortons), and Miami (Burger King).
The definitive agreement is expected to close in late 2014 or early 2015 and will create the third largest QSR company – behind McDonald's and Subway – that generates approximately $23 B in system sales, and includes more than 18,000 restaurants in 100 countries.
According to a joint release from the companies, following the closing of the transaction, each brand will be managed independently, while benefitting from "global scale and reach and sharing of best practices that will come with common ownership by the new company."
On a conference call held this morning, Alex Behring, executive chairman of Burger King and managing partner of 3G, called the new company a global powerhouse.
"By bringing these two iconic brands under single powerful platform, we will be able to create more value than either can on its own. The plan is to take the beloved Tim Hortons brand to the rest of the world following the proven international growth model we pioneered at Burger King," he said. "We will also leverage best practices and shared services and be a more efficient organization. The new company will be one of the fastest growing, most profitable QSRs in the world."
The new company, which will unveil its name at closing, will be listed on both the Toronto Stock Exchange and the New York Stock Exchange.
Tax motivation allegations denied
Behring acknowledged early media reports claiming the move was a tax inversion for Burger King, but denied the rumors.
"The motivation for this transaction is creating a global leader in QSR and not being driven by tax rates. Burger Kings current rate is in the mid-to-high 20 (percent) and that is consistent with Canada. We will continue to pay federal, state and local taxes in the U.S.," he said.
Daniel Schwartz, Burger King's CEO, said the tax rate isn't expected to change materially.
"This transaction is not really about tax," he added.
The growth driver
As both brands continue to operate independently, they will maintain their autonomous franchising relationships, including current royalty rates. Franchisees from Burger King and Tim Hortons are largely on board with the news, executives said, and remain committed to the objective at the center of the agreement – accelerated growth.
"It will be two strong brands operating independently focused on growth with a high sense of urgency," Tim Hortons CEO Marc Caira said on the call.
Burger King's CEO, Daniel Schwartz, added that the "real driver is the ability to bring a strong and beloved brand internationally using our strong network and all the progress we've made accelerating the pace of Burger King."
For example, just a few years ago, Burger King was growing at a pace of 150 units per year. Last year it was up to 670 units.
"What gets us excited is the idea of accomplishing something (like this) over the long term with Tim Hortons," Schwartz said.
"The new relationship will allow us to move much quicker than we thought we could move ourselves," Caira added, particularly in the "must-win" U.S.
Tim Hortons, which has 42 percent of QSR traffic share in Canada, will leverage Burger King's expertise in global development to reach this goal, Caira said.
Other than that accelerated pace, both Caira and Schwartz said it will be "business as usual" for both brands, noting there will "absolutely not" be any cobranding or menu crossovers.
Other highlights from the transaction:
- Both brands will continue focusing on their community causes, including education and emergency relief for Burger King, and Tim Horton's Children's Foundation.
- Behring said the agreement also boasts a strong commitment to Canada, including governance (three of the 11 directors will be Canadian nominated by Tim Hortons, for example), a listing on TSX and NYSE, and the headquarters' location.
- He also said the move will generate a "substantial" value for shareholders, including a 39-percent premium to Tim Hortons' 30-day volume weighted average share price on Aug. 22, and a 30-percent premium based on Tim Hortons closing stock price on Aug. 22. By receiving shares in the new parent company, Tim Hortons shareholders will have the opportunity to participate in the new company's longterm value creation potential.
- At the time of closing, Behring will lead the new global company as executive chairman and director. Caira will be appointed vice chairman and a director, focused on overall group strategy and global business development. Schwartz will become Group CEO of the new company, with overall day-to-day management and operational accountability.
- Caira and Schwartz will continue as Tim Hortons and Burger King CEOs, respectively, through the transition period, and additional executives in the new global company structure will be identified from Burger King and Tim Hortons during the transition period and announced at the time of closing.
- Burger King has obtained commitments for $12.5 billion of financing to fund the cash portion of the transaction, including commitments for a $9.5 billion debt financing package led by JP Morgan and Wells Fargo. Berkshire Hathaway (which also owns Dairy Queen) has committed $3 billion of preferred equity financing.
