Burger King’s (BKW, Financial) $12.5 billion acquisition of Tim Hortons (THI, Financial) will enable the company to shift its global headquarter from the U.S. to Canada. While many think the move was taken to experience some tax relief, that’s not the whole story. The American fast food giant raised its offer price to executives at Tim Hortons thrice before they decided to enter into a merger. The discussions of merger began in March.
The inception
The deal started after Alexandre Behring, the chairman of Burger King and managing partner of the burger chain’s majority owner, 3G Capital, approached Warren Buffet to see if the billionaire was interested in supporting them financially. Warren Buffet approved of the merger like he had previously invested in 3G Capital to help them take over H.J. Heinz Company in 2013. A takeover circular was submitted by both the companies to get the approval of the shareholders too.
The directors and executives of Tim Hortons did not respond to Burger King’s approach so easily. They took nearly six months to decide whether this deal would be fruitful for them or not. Tim Hortons was first approached by Burger King on March 12, a banker from Burger King called the chief executive officer of Tim Hortons, Marc Caira, and informed him about it. On March 20, Mr. Caira and Mr. Behring met for dinner in Toronto but no terms and conditions were discussed then. On March 24 Burger King and 3G Capital sent a joint letter to Tim Hortons opening the bid at $73 a share.
Tim Hortons’ did not respond to it. Then again on June 27 Burger King raised the bid to $82.50 a share. This, too, did not satisfy Mr. Caira, and he wanted the bidders to raise the price a little more. Finally on August 15 Burger King offered $88.50 a share and a lot more commitment from its end promising Tim Hortons that its individuality would be maintained. This deal appealed to Tim Hortons, and it finally agreed for the merger.
The terms of agreement
They made it clear to Burger King that even after the merger they would have a "meaningful" number of Canadian employees in the company and also mentioned that they would stay in Canada and would not move out of it. They also stated that even after the merger they would finance the franchisees and would not be stopped from any kind of renovation or taking rents and royalties from the franchisees for five years.
The new company which will be formed after the merger would have its headquarter in Canada. This news created a rage in the U.S. Burger King was accused of shifting its headquarter from U.S to Canada only because of a low corporate tax rate in Canada. However this isn’t the complete story. Having the headquarters in Canada would enable Burger King to transfer money overseas to Canada and pay lesser tax there. Canada has a federal tax rate of 15%. However it should be noted that Burger King has not been relieved of paying taxes. Finance Minister Joe Oliver rightly points out:
“Double non-taxation is what countries are concerned about... But that is not the case in this matter at all. It’s important to make that clear distinction. This company will be paying its taxes and it will be paying taxes where it operates, in Canada, in the United States and elsewhere”
The executives at Tim Hortons said they would not like any kind of interference from Burger King in managing the coffee and doughnut chain. They would like to work independently and would appoint three directors to the board. The new company has more than 18,000 restaurants across 100 countries.
The takeaway
The merger will produce the world’s third-largest fast food quick serve restaurant company, which is expected to do a business of $23 billion annually. The new company formed would be listed both in Toronto Stock Exchange as well New York Stock exchange. Daniel Swartz, Burger King’s chief executive, would become the chairman, and Marc Caira would become the vice chairman. The merger is expected to prove beneficial to both the companies. Burger King would strengthen its position in the breakfast sector and Tim Horton would grow internationally.
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