The announcement last week of a $12.5 billion friendly takeover of Tim Hortons by international burger chain Burger King left many surprised as this latest mega-merger hit the business wires.
The deal was unanimously approved by the boards of both companies, but is still subject to shareholder approvals. It is expected to close in 2015 and regulators in both countries will be involved.
To help finance the deal, JP Morgan and Wells Fargo are contributing U.S. $9.5 billion in debt financing and Warren Buffett’s Berkshire Hathaway is contributing U.S. $3.0 billion in the form of preferred shares in the combined company.
Daniel Schwartz, the 34-year old chief executive of Miami-based Burger King will be the new CEO. Tim Hortons chief Marc Caira will be named director and vice-chairman of the newly formed company, which will be relocated to Canada in Oakville, Ontario.
The new deal will make the company the third-largest quick service restaurant in the world. It will have combined global sales of $23 billion and operate in approximately 18,000 locations and 98 countries around the world.
Spokespersons from both companies say that both Tim Hortons and Burger King will continue to operate independently and items from one restaurant will not show up on the other restaurant’s menu. The merger will not affect franchisees and in fact, Burger King recently sold off almost all of its corporate stores after itself being acquired by 3G Capital.
Brazilian private equity firm 3G Capital is the majority stake holder of Burger King and will continue to own the majority of shares (51%) in the new company, which will be listed on the Toronto Stock Exchange and New York Stock Exchange.
3G Capital has quickly turned around the troubled Burger King to increased profitability and provides expertise in International expansion. Schwartz said, “3G has been extremely successful converting strong brands and making them even stronger.”
3G Capital has a reputation as an aggressive cost-cutter and after Mr. Schwartz took the helm at Burger King about a year ago he slashed costs heavily. He has also surrounded himself with a fairly young executive team. The question remains whether or not cost cutting will be a focus in this latest merger with Tim Hortons?
3G Capital is also the co-owner of HJ Heinz, which it purchased in 2013 in conjunction with Berkshire Hathaway. At both Heinz and Burger King, 3G Capital imposed stark spending cuts and implemented “zero-based budgeting” where managers do not use the previous year as a base for spending. They instead start at “zero” and build the budget from there.
The current restaurant count for both chains is as follows:
Tim Hortons: 3,588 (Canada), 859 (US) and 293 (International)
Burger King: 281 (Canada), 7,155 (US) and 6,231 (International)
Both Tim Hortons and Burger King stand to benefit from this latest deal since both have challenges that need ironing out. Tim Hortons retains iconic status with Canadians but has so far struggled to gain the same type of traction in US and International expansion efforts.
Wendy’s International bought Tim Hortons in 1995 and sold it in 2006 amid unsuccessful efforts to drive growth in the US. Tim Horton’s also recently ended a five-year partnership with Cold Stone Creamery to sell ice cream in some of its stores.
Burger King’s expertise in the American market may help Tim Hortons hit its stride in the US, but this latest merger begs a certain question. If Wendy’s was not able to grow Tim Hortons in the US, how will Burger King be successful?
Tim Hortons faces stiff competition in the U.S. from the likes of Starbucks, Dunkin’ Donuts and McDonalds. Burger King will give the chain the much-needed expertise and brand marketing to attempt significant U.S. and International expansion efforts.
On the other hand, Burger King remains saturated in the U.S. and also faces stiff competition in the fast-casual segment and breakfast segment. It serves Starbucks-owned Seattle’s Best coffee to compete with McDonald’s McCafe.
This deal allows Burger King to tap into the Canadian market in a major way by giving it a strong foothold in the breakfast and coffee segments. Currently, Tim Hortons has over 70% of the baked goods market in Canada and a majority of the Canadian coffee market. It sells eight out of 10 cups of coffee consumed in Canada.
The deal also changes the tax situation for Burger King. By relocating to Canada there will be overall lower corporate taxes. Some are viewing the deal as a tax inversion deal where a company relocates headquarters to a country with lower taxes.
However, Mr. Schwartz says the deal is not about tax inversions, but rather about taking Tim Hortons international. He said, “We’ve known that this has been quite a gem of a company and just a phenomenal brand for some time now.”
Observers will be watching how the deal plays out and whether or not this deal will successfully grow Tim Hortons outside of Canada.