On August 5, 2014, I had written on my positive view on Burger King (BKW) and why the stock was a buy. Yesterday, the stock surged by 19.5%, for different reasons, but I am more bullish on the stock than ever before.
On Monday, the news that Burger King is in talks to buy Canadian doughnut giant Tim Hortons (THI) was the reason for the stellar rally in the stock. While Burger King surged by 19.5%, Tim Hortons surged by 18.9%, indicating that the markets view the possible deal as positive for both the companies.
One of the biggest advantages of the deal would be tax saving for the combined entity, and this is the primary reason for the rally for Burger King. If the deal is through, Burger King would move its headquarters from the United States to Canada.
Canada’s federal corporate tax rate is currently 15%, and this is significantly lower than the United States where the tax rate can be as high as 35%. On a possible deal, Burger King would be making big tax savings by shifting its headquarters to Canada.
After the transaction, 3G Capital, the majority owner of Burger King, will continue to own the majority of the shares of the new company on a pro forma basis, with the remainder held by existing shareholders of Tim Hortons and Burger King.
The second big advantage of the deal would be the creation of the world's third-largest quick service restaurant company, with approximately $22 billion in system sales and over 18,000 restaurants in 100 countries worldwide.
Burger King is already having an edge over McDonald's (MCD) and Yum! Brands (YUM) as I explained in my article on Burger King. This merger will enhance the company’s global presence and brand value. Tim Hortons and Burger King each have strong franchisee networks, and this will continue to grow bigger after the merger.
There is also speculation that Warren Buffett (Trades, Portfolio) will provide around 25% of the deal financing by taking preferred shares. If this is indeed true, it would be another positive as Warren Buffett (Trades, Portfolio) puts his money where there is value and growth.
Product innovation and diversification has been one of the strategies of growth for Burger King. The merger with Tim Hortons would give the company an entry to the coffee and breakfast food market where Starbucks (SBUX) has witnessed good success.
Tim Hortons has a big presence in Canada with 3,630 restaurants. However, the company has only 866 restaurants in the United States. Therefore, the merger would provide a big opportunity in terms of market expansion in areas where the coffee outlets are still not saturated.
In conclusion, the deal seems to be a win-win situation for both the parties. Burger King has made all the right moves to grow at a robust pace in the last few years, and this can be another feather in the cap for Burger King. I believe that the combined entity will also be looking at growing at a strong pace in emerging markets where Tim Hortons has limited presence.
The details and finalization of the deal is still pending, but initial news points to things being positive for both the companies. I therefore believe that long-term investors can still consider exposure to Burger King even after the 20% rally on this news. As the deal is finalized and closed, there is immense possibility of more value creation.