Burger King Worldwide Inc. (BKW:US), the second-largest U.S. burger chain, is in talks to buy Tim Hortons Inc. (THI) and move its headquarters to Canada, becoming the latest American company seeking to relocate to a lower-tax country.
Burger King would create the world’s third-largest fast-food chain by merging with Canada’s bigger seller of coffee and doughnuts, the companies said in a statement. 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.
The deal renews debate over American companies shifting their headquarters internationally in search of lower corporate tax bills. The trend drew criticism last month from President Barack Obama, and his aides vowed that the administration would take action to curtail the practice.
“There’s some modest political risk to the deal, but it’s difficult to say because we haven’t seen the administration move to block one of these yet,” said Will Slabaugh, an analyst at Stephens Inc. in Little Rock, Arkansas.
The merger talks sent shares of both companies soaring. Burger King rose as much as 18 percent to $31.88, the biggest intraday jump since the stock debuted on the New York Stock Exchange two years ago. Tim Hortons climbed 21 percent to C$83.25, reaching a record high. The stock gains propelled the market value of Burger King past $11 billion and Tim Hortons over C$10 billion.
The proposed deal would give Burger King access to a coffee brand with a cult following and potentially help boost breakfast sales (BKW:US). Burger King now sells coffees under the Seattle’s Best name, which is owned by Starbucks Corp. Tim Hortons also would let Burger King get into the grocery business by selling packaged coffees at supermarkets in North America.
3G Capital, which has a 70 percent stake in Miami-based Burger King, would own the majority of the shares of the new company, according to the statement. The two businesses will operate as stand-alone brands, though there may be supply-chain cost savings from combining them.
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3G was co-founded by billionaire Jorge Paulo Lemann, Brazil’s richest person. The firm’s managers have gained a reputation by squeezing costs out of the companies it acquires, Slabaugh said.
“These guys are known for making some very smart financial moves,” he said.
3G, which teamed up with Berkshire Hathaway Inc. last year to buy HJ Heinz Co., has made cost cutting a priority at the ketchup company. Heinz 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 the Canadian tomato-juice factory.
In Burger King’s case, the new combined business would have about $22 billion in sales and more than 18,000 restaurants in 100 countries. The deal is subject to negotiation, and Burger King and Tim Hortons don’t plan to comment further until an agreement is reached or discussions are discontinued, according to the statement.
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Between mid-June and late July, when Obama began criticizing deals that cut taxes by relocating outside the U.S., at least five large American companies have announced plans to make such a move -- known as an “inversion.” That includes AbbVie Inc. and Medtronic Inc.
Since the start of 2012, at least 21 U.S. companies have announced or completed the deals, comprising almost half the total of 51 such transactions in the past three decades.
Burger King already pays a rate below 40 percent, the result of operating in a mix of tax jurisdictions. Its effective tax rate in 2013 was 27.5 percent, the company said in a filing. Still, the rate may eventually creep up toward 35 percent without the inversion, Slabaugh said.
Tim Hortons, which has about 4,500 restaurants, is expanding its product lines to boost sales. The Oakville, Ontario-based company posted results this month that beat estimates and said fiscal 2014 profit will top or be at the high end of its target range.
Burger King, meanwhile, has been trying to revive growth in a moribund fast-food industry. Its revenue (BKW:US) fell 6.1 percent to $261.2 million in the second quarter, while same-store sales in the U.S. and Canada rose 0.4 percent. To help streamline the chain, Burger King has been trying to introduce fewer new items, helping its kitchens move more quickly.
The plan to move to Canada follows Burger King’s stock-market debut in 2012. The chain had been taken private in 2010 by 3G, which got $1.4 billion in cash from the public offering.
About a year after it was taken public, 3G put one of its partners, Daniel Schwartz, at the helm of the fast-food chain. Schwartz, 33, a Cornell University graduate, had no experience in the industry before going to Burger King. Chief Financial Officer Josh Kobza and Alex Macedo, who runs North America for Burger King, also are under 40 years old.
U.S. fast-food restaurants are struggling with shaky consumer confidence and steep competition, adding pressure to find ways to alleviate the burden. Burger King has been trying to draw customers with value deals, such as a two-sandwiches-for-$5 offer, as well as some new limited-time fare such as chicken fries.
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 and has become one of the nation’s most recognized brands.
Still, it’s been difficult to build the brand south of the border. Investors have criticized the company’s U.S. growth strategy, saying it hasn’t gotten much of a payoff from the hundreds of millions spent over the past decade. In an interview last year, CEO Marc Caira said winning over U.S. consumers was key to Tim Hortons’ strategy.
“The U.S. for me is what I call a must-win battle,” he said.
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